Academics and Research

Business professor offers five tips for managing credit-card debt

Ali Besharat's current research focuses on unhealthy consumer consumption and overspending.

Ali Besharat’s current research focuses on unhealthy consumer consumption and overspending.

In addition to his teaching, Ali Besharat, an assistant professor of marketing at the Daniels College of Business, studies consumer behavior. Combining his interest in consumer decision making and marketing communications and branding, Besharat’s work has been widely published in academic journals and popular media outlets, from the Journal of Consumer Psychology to Yahoo! and 9News. Originally from Iran, Besharat earned a bachelor’s degree in mechanical engineering and an MBA from Sharif University in Tehran. Before earning his PhD in marketing from the University of South Florida, he worked as a consultant in the energy industry.

His current research focuses on unhealthy consumer consumption and overspending, including the ways in which Americans use — and misuse — credit cards. Here, Besharat offers five tips to avoid overspending and long-term debt to successfully build a high credit score.


1. Choose other methods of payment if you have issues with spending.

Research shows that people spend more when paying with a credit card compared to other forms of payment (e.g., cash, check or debit cards) because the pain of payment, the negative feeling of parting with money, is deferred.


2. Pay the balance in full every month.

Interest rates on credit card balances are usually very high (14–26 percent). Although credit card companies may provide the option of making partial or minimum payments toward your full balance, attempt to pay the entire balance, or pay the highest amount possible. The remaining balance will accrue interest. In the next billing cycle, you are then responsible for the interest on the original balance and on the interest it has already earned. This is referred to as a compound interest rate. Many debtors who roll over their balance from one billing cycle to the next may find it impossible to climb their way out of debt, because they are mainly paying for the accumulated interest charges, rather than the actual cost of their purchases.


3. Know your credit line.

Your credit line determines the amount of money you are allowed to spend with your credit card within a billing cycle. Thirty percent of your credit score derives from the credit-utilization ratio, the amount you owe divided by the credit limit. To keep the credit-utilization ratio within a healthy range (less than 30 percent), you either have to use the credit card for occasional expenses only or request an increase in the credit line to offset the amount you plan to spend on monthly expenses. This consideration is important, because, for example, a monthly balance of $200 on a card with a $500 limit can ding your score as it results in a debt-utilization ratio of 40 percent).


4. Avoid treating your card as a source of cash.

Never withdraw cash from your credit card (cash advance). You will end up paying interest plus a transaction fee, which could be as much as 6 percent of the amount of cash borrowed. That means the value of those borrowed dollars is worth significantly less than their face value.


5. Always repay the card with the highest interest rate first.

If you have a balance on more than one credit card, always pay back the credit card with the highest interest rate first, no matter the size of the balance. Also, all expenses on your credit card must be viewed the same. Avoid emotional attachment to certain expenses and do not postpone their payment until they are experienced (for example, an expense for a vacation package that has yet to occur). It may be tempting to pay for past expenses first and delay payment of future expenses, but it’s best to avoid it. Finally, all sources of your income, everything from salary and bonuses to tax returns, should be used to help you attain your debt-reduction goals. Don’t allow your mind to trick you into thinking that windfall money (e.g., a reward check) is only meant for fun activities rather than debt payments.



Leave a Reply

Your email address will not be published. Required fields are marked *