Here’s my Quick and Easy 4 Rule’s of Debt

Rule #1: Skip the 0% financing

Today, it is very common to see 0% financing deals on consumer goods like appliances, electronics and furniture. Although this may seem tempting, especially when they tell you you don’t have to make any payments for a year or longer, these deals often have lots of fine print that could cost you money, and end up as bad debt.

Sometimes if you don’t have your balance paid in full by the time the interest rate offer expires, you may be charged interest retroactively on any remaining balance on your account. Usually at a pretty high rate.

When my wife and I got married, we bought some furniture on a 12 month 0% financing offer. I was well aware of some of these tactics and so I paid the bill in full about 6 weeks before the end of the offer period. The next month I received a bill in the mail saying I owed $0. I thought ok, they are just letting me know its all paid off. The next month I received a bill for $25, which was a late fee for not paying my bill the month before. Even though I called to take care of it right away, this kept happening for several months until it was finally resolved. They apologized, and basically told me that hardly anyone pays these things off before the end of the promotional offer and their system didn’t know how to handle it.

Today I never take advantage of promotional offers. When interest rates are high you could argue that you are making some interest on your money while you’re waiting to pay the loan off. With todays interest rates you are likely to only make a few dollars at best.

Therefore, my advice is, if you can’t pay cash for it now, don’t buy it. If you’re buying something that has a really good promotion ask them what they can do for you if you don’t take the financing option. Maybe they can offer an additional discount or throw in something else for free.

Rule #2: Avoid Bad Debt!

Good Debt vs. Bad Debt

Some people are fooled into thinking some debt is good debt because they can deduct the interest they pay off of their income taxes. I think some people believe that somehow they are getting something for free or that the interest doesn’t matter because they get it back on their tax return.

But, this is simply not true. All interest that you pay costs you money.

Here’s an example.

Let’s say you pay $5,000 per year in mortgage interest on your house. If you itemize your deductions you can deduct the $5,000 from the amount of your income that you pay taxes on. If you were in a combined state and federal income tax bracket of 25% you would actually get back an extra $1,250. But that still means the debt cost you $3,750.

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Obviously this is better than not being able to deduct the interest, but don’t be fooled into thinking the debt is good debt just because you can deduct it.

Rule #3: Don’t ever open a store or merchant credit card!

It seems like every time you go to check out at a major store these days they ask you if you would like to open a store card to save an extra 10-30%. Even though sometimes the discount may be very tempting I never go for these types of cards. Once you have made that first transaction thats pretty much it, and now your stuck with this extra card in your wallet.

Once you sign up for the card, now you will be on their mailing list for all of their special promotions, which will only encourage you to spend more money with them.

Therefore, my advice is, don’t ever open a store or a merchant credit card. The discount offer is hardly ever worth it. Besides store cards are notoriously among the highest interest rate cards out there. Use a universal rewards card instead to accumulate points towards travel or cash back rewards.

Rule #4: Use a rewards card and pay it off every month

Today there are dozens of rewards types of credit cards. Some pay you a percentage of your cash back, some give you points that can be redeemed towards travel or other merchandise. All of this is designed to entice you to spend more money.

Using credit requires discipline, but if you can be responsible, consider using a credit or charge card for as many of your everyday transactions as possible for several reasons.

Here’s a few benefits to using a rewards card for most of your everyday purchases…

Tracking

Using a credit card for everyday transactions like buying groceries, filling up your car with gas, or going out to dinner allows you to easily track where your money is going every month. Many cards now automatically breakdown your expenses by category and some will even provide you with a year end report of all of your transactions for the entire year.

Rewards

As long as you don’t get carried away with the rewards and start spending more money than you should, this is a nice additional perk for using the card to buy things you were going to buy anyway.

Over the last several years our family has been able to use rewards points to fund a majority of our family vacations, including hotel and airfare.

Simplifies Bill Payment

Another advantage of using a credit card for most of your transaction is the convenience of just writing one check to the credit card company every month instead of many checks.

Fraud Protection

If you lost your wallet with a bunch of cash in it, chances are, even if you did get end up finding it, the cash would be gone. On the other hand if your credit card was stolen or lost, even if someone did use your card, the credit card company would not hold you responsible.