A debt free lifestyle is within your reach
The Vault
by Graham Barber

Credit cards have become a necessity of modern life. Whether you are booking a hotel room, buying concert tickets, or renting a movie, credit cards are the utmost in convenience and payment flexibility. But for all their positive uses, it's temptingly easy to overextend yourself using credit cards.

Taking advantage of the convenience of credit cards and then paying them off on time is a good use of credit. On the other hand, misusing credit cards can set you back financially - today and tomorrow.

A question of value Bestselling financial writer David Bach, author of numerous books including The Automatic Millionaire, believes that debt - particularly highinterest rate credit card debt - can be a trap. Bach distinguishes between debt used to buy something of value, such as a home or business, and debt used simply to fund lifestyle purchases that offer no longterm value to you or your family.

Running up large balances on our credit cards and not paying them back on time means that we have less money for things like travel and retirement savings. By consistently spending more than we have - and incurring high interest costs in the process - we often end up short-changing our long term financial futures.

Did you know? About two in five Canadians owe an average of $3000.00 on their credit cards.

Getting out of bad debt

So what do you do if you are buried in a mountain of credit card debt? Bach suggests the following steps.

Find out what you are paying in interest. If you don't already know what you're paying in interest costs, call the company and ask them the effective rate of interest on your card.

Ask for a lower rate. Like many other areas of business, competition amoung credit card companies is fierce. Once you've found out what you are paying, ask the company for a lower rate.

Consolidate your debt. Consider taking out a line of credit to consolidate your outstanding debt at a lower rate. Taking this step can potentially save you a bundle on interest costs.

Did you know? If you made a $1000.00 purchase on your credit card and made only the minimum monthly payments, it would take you almost 13 years to pay it off (assuming an 18% rate of interest), and cost you $2100.00 in the process.

Save money today, build for tomorrow. Although it's a good idea to pay off highinterest

debt as soon as you can, it's also smart to establish good savings habits.

One of David Bach's key principals for building wealth is to "pay yourself first" by having money automatically deducted from your chequing account and directed into your retirement savings account. Now, if you are carrying credit card debt, you'll need a different strategy.

Bach suggests the following. Let's say you can reasonably save $400.00 a month (for tips on how to find extra cash, see the previous article "What's your Latte factor?"). Use half that money to pay off your credit card debt (or line of credit) and out the other half towards your retirement savings.

With this strategy you can begin to work yourself out of debt and save for the future at the same time. To ensure you stick to this strategy, make the whole process automatic by having the money taken out of your

bank account each month, with half going toward paying off your outstanding balance, and the other half to your retirement account.

Staying out of debt

Once you are out of debt, here are some tips that can help you stay that way.

Paying off your cards on time. The easiest way to avoid the bad debt trap. Find out the grace period time on your credit card (typically from 15 to 30 days) and use it to your advantage.

Use your debit card. If you have a tendency to run up credit card purchases that exceed your cash flow, use your debit card when you would normally use your credit card. The money comes directly out of your bank account and limits your spending to what you can afford in cash.

Limit yourself to one or two cards. This reduces the temptation to abuse credit cards and makes recordkeeping easier.

Avoid department store/retail cards. The effective rate on these cards is often higher than the main types of credit cards.

Get a line of credit. A personal line of credit is a more cost-effective way to get access to cash when you need it - in fact, you can usually draw on it from your bank machine. By applying for a line of credit when your financial situation is in good shape, you can often get a better rate.

Use savings (instead of credit) for lifestyle needs. In need of a vacation? Plan ahead by saving money on a regular basis using a "vacation" account.

The proceeding information was provided by Graham Barber, Branch Manager of Scotiabank, Alcona Branch.

The Scotiabank, Alcona Branch, is located at 1161 Innisfil Beach Road, (705) 431-6116. The Vault is a weekly series of articles provided by Graham Barber with financial advice and suggestions.