Prior to the change, New Year’s was celebrated on the first of April instead of the first of January.
It took some time for news of the new calendar to spread, so peasants in remote areas were still celebrating the original New Year’s holiday on the first of April. Those in the know teasingly called them “April Fools.”
While it may seem as though modern life would make it impossible for anyone to be so hopelessly out of the loop in the 21st century, there are still people who are following wrong-headed ideas, often into financial disasters. These modern-day fools are often following out-of-touch methods for using credit—and hurting themselves in the process.
Have you ever foolishly abused your credit card in one of these ways?
Foolish Habit #1: Only paying the minimum each month.
This is an easy trap to fall into, even though all of us should know better by now—especially since the 2009 Credit CARD Act now requires credit card statements to indicate how long it will take you to pay off your card if you only pay the minimum.
Unfortunately, offering cardholders a minimum amount to pay does some voodoo on our brains. The effects of anchoring—a cognitive bias wherein hearing or seeing a number affects our ability to think rationally about how much we should pay for something—makes us decide to pay less than we would if we weren’t offered a minimum payment amount. The low number helps us “decide” to pay less than we might otherwise, even if we do pay more than the minimum.
The Smart Way: Pay your credit card bill in full each month.
Obviously we should all be doing this, although there’s still hope for those who are in over their heads. Rather than rely on your credit card to tell you how much to pay, decide how much you will pay each month before you open your statement. And for heaven’s (and your own) sake, stop using the card until you’ve paid it off!
Foolish Habit #2: Making charges you’re not sure how to pay for.
The devious thing about credit cards is that they provide us with a false sense of security. We can run out of the house with just our credit card and know that we can pay for anything, from a snack at a fast food restaurant to a major purchase, without having to stop by the bank, check our balances, or otherwise think twice about it.
Part of the reason why we can so easily fall into this habit is because the old-school wisdom was to never make a credit card purchase when you could pay in cash. But the big hole in that theory was the fact that you would choose to use your credit card only when you had no method of ultimately paying for the purchase.
The Smart Way: Pay in cash and plan your credit purchases.
The intention behind the old advice was to make sure you carried cash and paid for your purchases with it, rather than with credit. And that is sound advice. Carrying cash will make sure that you don’t spend more than you have, since cash has a disconcerting habit of being gone once you’ve spent it.
However, the other side of the coin has to be making certain you don’t make any credit card purchases that you haven’t planned for. Meaning—you always know where the money will come from to pay for any particular credit card purchase. If you’re not able to do that, then it’s safer to leave your credit cards at home (in a block of ice, if necessary), and always pay with cash.
Foolish Habit #3: Signing up for one-click shopping online.
We all love convenience, and with our hectic modern lives, why not take advantage the things that will ultimately save time? That’s the way that Amazon, iTunes, and other online retailers sell you on the “convenience” of saving your credit card information and enabling one-click shopping.
But these “conveniences” deprive you of the opportunity to second-guess your purchases, which is an important step in ensuring that you really want to buy whatever is striking your fancy. It’s even more dangerous when you have Kindles, iPads, and other devices that allow you to shop directly from them—when you can shop anywhere without even having to stop to get out your credit card, you’re much more likely to make impulse purchases. And those bad boys add up, even if it’s “only” a $9.99 Kindle download here and a 99-cent music download there.
In a recent article on one-click shopping, Farnoosh Torabi said this about making purchases this way:
“Money is abstract as it is, and it’s why a lot of us have a hard time managing it. If you have to see money leave your wallet, overspending is harder. But with things like Google Wallet, it’s very easy, a lot quicker. And we already tend to overspend with credit cards.”
The Smart Way: Institute a 24-hour online purchase rule.
Convenience is an excellent goal when it comes to other areas of your life, but one-click shopping is not one of them if you’re trying to fix your finances. If you find something you’re interested in buying, bookmark the page and force yourself to wait a full day before actually making the purchase. This will help you determine if you really need the item, or if you’re simply bored, feeling down, or otherwise shopping to fulfill an emotional need.
On top of that, just don’t allow sites to store your credit card information. Not only does that leave you more vulnerable if the site is hacked, but having to manually enter your digits for each purchase can give you enough breathing room to think twice about your purchase.
The Bottom Line
Even the savviest credit card user can make foolish decisions. Rather than being an April Fool year round, make sure you use your credit card mindfully. It’s the real trick behind managing your credit.
Have you ever foolishly abused your credit card like having one-click shopping enabled?