AMES, Iowa -- Iowa State University's Tahira Hira recently worked with New York Stock Exchange (NYSE) Euronext developers to launch "Money Sense," a new online resource for workplace consumers to improve their money-management skills. But while that has all the "bells and whistles" on money management, Hira says there's one golden rule when it comes to debt.
"It's not rocket science and it's very simple. The very first thing is to understand how much I make and what my limits are, and try to live within those means," said Hira, a professor of personal finance and consumer economics in Iowa State's Department of Human Development and Family Studies. "So to think that credit cards are there to help me live at a level which is beyond my means is absolutely a mistake."
As chair of the NYSE Euronext Financial Literacy Advisory committee, Hira recently had the honor of ringing the opening bell at the New York Stock Exchange. She's now more determined to also sound the alarm on the country's need for greater financial literacy in order to curb our credit addiction.
Define purchase parameters
Hira understands the need to carry credit cards for both emergencies and greater ease in making financial transactions, but urges consumers to first define their purchase parameters before they choose to charge.
"We need to understand for what purpose it makes sense to borrow at a very high interest rate, which is what people pay on with their credit card balances," said Hira. "When we change the credit card use from paying for purchases to making partial or minimum payments and starting to carry balances over each month, we have turned the credit card into a loan machine. We are using it to borrow money for buying things that are not within the limits of our monthly resources. Is that really the best place to borrow money for supporting a lifestyle that is beyond our current means?
"As a rule, don't borrow money for things like eating, drinking, buying clothes and taking vacations, because those purchases will be done and you will be paying money on them for a long time. So what you are doing is mortgaging your future income."
Hira says new credit card regulations from the Credit Card Accountability, Responsibility and Disclosure Act should better protect card users from hidden fees and prevent card companies from marketing cards to young people who can't afford them. It also amplifies the nation's problem in resisting the powerful influence of credit.
"Anytime you have something that powerful [credit card], it has an equal power to destroy the user -- if not used properly -- and it has an equal power of destroying the issuer if it is not issued or managed properly," Hira said. "And now I don't have to say anything about whether credit was managed properly by the users or issuers because if it had been, we wouldn't be here."
Take personal responsibility
While government legislation more closely regulates the issuers, Hira says it still doesn't address the most critical problem.
"We are creating a much safer environment for people to use their credit cards, and that's a good thing," she said. "But where do we go from here? Does that mean everybody's now going to magically be OK with credit cards? No. We still need a sense of responsibility. We need the person who agrees to take that card to learn what that means."
She advises consumers to ask these questions before they sign
up for a credit card:
• What are the terms?
• What's the interest rate?
• What's my limit?
• How much can I charge?
• What are my options to choose the most affordable card?
• How many cards should I have?
• What am I using the card for?
• How should I be making my payments?
When making payments, she urges card holders to avoid falling into the minimum payment trap.
"The most detrimental feature of the credit card, in my opinion, is the minimum monthly payment opportunity," Hira said. "It is so minimum that it's almost like you are locking people into a lifelong imprisonment, because the way the minimum payment works, it will never be paid. It is a very good investment for the issuer because there's hardly any other investment that pays that high rate of return."
Hira says if card holders are living within their means, they should be able to pay what they charged each month. And she sees that as the job of responsible consumers.