Tuesday, May 28, 2013

Finance: Credit Cards - Useful When Used Smartly

The Bottom Line:

Credit cards not your friends
Go ahead, use them wisely
Don't get used by them

In today's almost cashless society, credit cards have become a way of life for most Americans.  And that's a shame because they are also a quick and easy way to ruin your credit and your financial life.  After all, it's so easy to charge it and worry about how you will pay it off later.  But if you are smart, you can learn to make wise choices with your credit cards and avoid the pit falls.  Here are some tips for you.

Be Aware

All credit card companies I know about allow you to create an account on-line and view your recent activity any time.  That's an excellent tool.  You can use it to see what your current balance is so when the bill comes, you aren't surprised by a bill you can't pay.  Do keep in mind that charges you make might not be reflected for 24 to 48 hours (and longer on the weekends), so be aware of your most recent charges and see if they are showing up yet.

Learn to Say No to Yourself

The biggest promise of a credit card is the ability to have something you want now.  As Americans, we've been trained to give in to our every impulse.  In order to avoid the pitfalls of credit cards, you need to learn to fight that.  Do you really need that outfit?  Is the latest gadget really going to be used or will it collect dust by the time the bill comes?

Even more important than will you use something is can you truly afford it.  This is where budgeting comes into play.  That's a topic for another day, but the short version should be, if you can't afford to pay cash for it today, you shouldn't be buying it with a credit card either.

I know; self-control isn't fun in the short run.  But being able to pay your bills is always pleasant tomorrow.  And some of my favorite purchases are the ones I saved up to get.

Pay the Balance in Full

If you are following the first two tips, this one will be no problem for you at all.  Before the bill is due, make sure you have paid the entire new balance.  Why?  Credit card companies live to charge you interest.  That's how they make their money.  And that's why the lowest interest rate on a card is usually around 25%.  Start thinking about how much money you are spending on interest.  Even $100 would cost you $25 over the course of a year.  That's money you could spend to get into the movies twice if you paid your balance in full.  Why give a bank money you could spend on yourself?

Always Pay Above the Minimum

Okay, so you are a large enough balance you can't possibly pay it off this month.  Fine.  Pay every penny you possibly can.  The sooner you knock out that balance, the sooner you will stop paying the credit card company interest.  The minimum payment probably won't cover all your interest, so that interest will just be added to the balance you owe.  If you aren't careful, you'll wind up paying on that credit card for years thanks to the building interest adding to the amount you actually charged.

Can't Pay the Balance?  Stop Charging!

If you've gotten yourself into a pickle where you can't afford to pay off the balance and what you owe keeps climbing, don't make a bad situation worse.  Stop using the card.  Either make your purchases with cash or a debit card linked to your bank accounts.  Don't use your card again until the balance is paid in full.  All you are doing by making those charges is increasing the amount you owe.  That's not going to help you pay off the balance.  And many companies charge interest on your new purchases immediately if you have a balance.  If the goal is to pay as little interest as possible, you need to make the balance they can charge interest on as little as possible.

Avoid Fees

Most credit card companies charge you a fee if your payment is late or if you go over your credit limit.  Both of these are easy fees to avoid by paying attention to your balance and your due date.  Why give them money when a little time and effort on our part can prevent that?

Take Advantage of 0% Offers, Not the Other Way Around

Many store credit cards offer deals of 0% financing for a certain number of months on large purchases.  I've gotten a few credit cards for just such a reason.  So be sure to pay attention to those offers.  Some require a minimum monthly payment.  If that's the case, be sure to pay at least that month.  All the ones I've run across accrue the interest from the date of purchase until the promotion ends.  What does accrue mean?  Basically, it's a fancy accounting term that means they keep track of the interest they would make if they were charging you interest normally.  And all of these deals have a clause that lets them charge you the full amount of the interest if you don't pay it off by the promotion end date.

The simple way around getting hit with all that interest?  I'm sure you know where I'm going with this, pay off the balance by the end date.  Either set money aside in your savings account every month or, if you don't have that self-control, make a payment every month to the company.  These payments should equal the total you owe divided by the number of months of the promotion.  When the due date comes, you'll have a manageable amount left and you can pay off the balance without owing one cent in interest.

What About Emergencies?

I know, emergencies come up.  And credit cards are great for those times when you have an unexpected expense come up you can't do anything about.  If you need to use your card this way, do so.  But then go back to some of the things I said earlier.  Stop with some of the discretionary purchases you might make.  Don't use your card until the balance is paid in full.  In other words, keep the financial bleeding to a minimum.


Credit card companies want to be your friend.  But they make money by charging you fees and high interest.  With friends like these, who needs enemies?  Remember they are out to get you, and treat them as such.  Only use them for things you can pay off at the end of the month.  If you start getting in trouble, stop using them.  It might be painful for a few months, but once things get straightened around, you'll find you actually have more money to use on things you want and less stress from bills you can't pay.

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