Are we out of the woods yet?

The economy appears to be getting better, albeit ever so slightly. Although we had a slight downturn in the markets today, there were increases for the previouse 4 days and the DJIA is above 7,000 again. Looking at the chart, you can see that it was at almost 15,000 in October of 2007!

So does this mean we're almost "half way" recovered? Hardly. We must all remember that the rise of the market to those levels almost two years ago was the result of "false growth." Credit was EASY to get and ANYONE could get it. People were getting loans they couldn't afford...much less understand. But all of that is behind us right? Not exactly...

The "other shoe" that is about to drop is the situation with credit cards. The current average houshold credit card debt is a little over $8,000. You see, credit card debt is sliced up and sold just the way mortage debt was and now, debt collection is on the rise. The current economic conditions are causing anyone and everyone who is owed money to chase after it. If you're not being pursued by a debt collector yet, you're probably facing and increase in the interest charged by your credit card company!

So how do you avoid all this mess? Use your credit card as a tool in your financial plan NOT as a bank account. I use a credit card for everything I purchase. Groceries. Gasoline. Dinner out. Household cleaning supplies. Everything. BUT...I use it to help me manage to my budget and I pay off the balance every month. I review my spending by looking at my receipts weekly (I also use Microsoft Money to manage my finances) so I know going into the next week if I need to "slow down" my spending or if I have "a little room" for that night "out to eat." Using the card for major purchases like tires for the car means I don't have to carry cash (dangerouse) nor do I have to fumble with writing a check.

In addition, by using a credit card for everything, I have automatic 30 day payment terms with everyone. When I purchase something, I have between 30 and 60 days before the credit card bill is due. That means my money is in the bank earning interest for ME that much longer.

The secret to making all this work is discipline. I don't spend more than I can pay off each month and if I an unexpected event (e.g. car has to go in the shop), that becomes a "factor" in next month's budget and I just resolve to spend less. Spend $35 at the grocery store and see how much longer you eat verses going out to dinner once.

If you're already in trouble with your credit cards, there are a few things to do:

1. Establish a budget immediately and stick to it;
2. ALWAYS pay more than the minimum due and pay as MUCH as you can;
3. If you own a home, consider opening a home equity line of credit to pay off the card debt. The equity line interest rate will be much lower than the credit cards and the interest payments are TAX DEDUCTABLE!
4. If you have multiple cards, as you pay off the balances, cancel the accounts. Keep just one or two cards preferably the one's you've had the longest as it looks better on your credit score.
5. Take a look at these ideas too.

Make sure you are getting all the advantages of using a credit card (i.e. not carrying cash, 30 day payment terms with everyone, easily able to check spending weekly, etc.) and don't let them take advantage of you. If we all act responsibly with our money and our credit, people will continue to gain confidence in our financial system and the economy will turn around.