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The ‘$20 Rule’ – and How to Control Credit Card Debt

Posted on August 28, 2017

A lot of the advice you get about how to manage credit card debt is simple common sense: pay off your bills in full each month; don’t finance big-ticket items at high interest, etc. Some of the advice is a bit strange: freeze your credit cards in ice; melt only for emergencies. Sometimes we hear something new, and practical.

Such was the case when the Consumer Financial Protection Bureau recently released a worksheet that people can use to get a handle on their credit card spending and debt.

CFPB has released a whole set of guidelines that can be accessed here: https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/201701_cfpb_rules-to-live-by_my-credit-spending-rule-to-live-by.pdf.

However, one thing in particular caught our eye, and we’d like to share it with you here. Call it the “$20 rule.”

From the CFPB:

  • “Look at last month’s credit card bill Circle on your bill all the times you swiped your credit card for less than $20. Small costs can add up over time, so consider paying cash instead.
  • And, unless you pay your full balance off every month, interest and fees can add about 20% more to the cost of an item for average credit card customers.
  • Count up the number of times you used your credit card for a purchase under $20: ¨ Add up the total you spent on these small purchases: ¨ List the times and places you used your credit card for small purchases: ¨ On the list above, circle the times when you could have paid cash instead.”

That’s a pretty handy cutoff point – the kind of thing you can keep in the back of your mind as you go through your day. Whenever you’re tempted to pay for a small purchase with your credit card, stop and use cash (or your debit card) instead. This will keep those hard-to-remember small charges from adding up to big debt.

Now, the immediate answer from many of you will be: “But I get cash back on my credit card purchases. You’re asking me to give that up!”

True, but how many of us are disciplined enough to keep those purchases from adding up, and carrying over month-to-month?

The fact is, there is a certain, rather small percentage of the population that can really “game” the credit card system. They pay their bill off in full each month, and can really take advantage of those cash back (and other) deals without ever running up high-interest debt.

If you’re one of those people, you don’t really need advice in the first place.  Congratulations, such traits are to be admired.

But credit card companies wouldn’t stay in business if there were more than a few people in a crowd who had this combination of financial smarts and discipline. For the rest of us, there’s the ‘$20 rule’.