Don’t let credit cards take you permanently into debt
November 2, 2007
Craig — When I was little, my Grandpa drilled it into my head that if a person couldn’t pay cash for something, he couldn’t afford it. Unfortunately, along came credit cards and too many people seem to have lost the ability to assess what they can and can’t “afford.”
Credit is not an advantage when consumers use it to stretch their income. The Federal Reserve reports that 58 percent of households using credit cards pay interest charges each month. And, in recent years, the amount of the required monthly minimum payment has dropped, making it easier for people to “afford” to charge even more on their cards. That may seem to make it easier to keep up with your credit card bills. However, this is costly. Smaller minimum payments extend the life of the debt and result in much larger interest payments to the credit card company. In fact, for some consumers, making only the minimum payment means they will never pay off the balance owed.
The lesson is not to avoid credit, but to learn to use it so it that it works for you. Here are some tips on how you can prepare for handling credit responsibly:
Pay your balance in full each month, and say no to cash advances. Credit card issuers love customers who pay the minimum monthly payment, typically only 2.5 percent of the balance. If you charge up to your maximum credit level of say $500 to buy a television and make the minimum payment, at 18 percent interest, it will take seven years to pay off the balance (with no additional purchases), and you will have paid $365 in interest, making that an $865 television. (And you may not even still own the TV by the time you finish paying for it!)
Most cards offer an interest-free period if you pay your balance in full within a certain period of time. But, if you forget to mail your check on time or carry over ANY balance – even a dollar – you’ll forfeit the grace period and pay interest on all of your new purchases plus the outstanding balance. Some cards also offer rewards and cash-back programs that can equate to free stuff like gift certificates, air miles, electronic or recreational goods, meals, etc.
Credit card companies market to college students because they expect to have their business years after graduation – and with a pretty solid potential for making and spending money. When students arrive on campus, credit card companies are very aggressive about signing them up with incentives such as free T-shirts and other gifts. Be sure to talk with your kids about your expectations regarding their acquiring and using credit card(s) – many times a parent has to co-sign for their children until they are 21. If used carefully, students who use credit cards can build a positive credit history and have a source of payment for emergencies. But credit cards are very seductive and without thinking about it, students can reach their credit limits without a source of income to pay off the debt.
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Because some credit cards have annual fees and high interest rates, using credit to your advantage means finding a credit card with the lowest possible annual costs. Don’t be tempted by ads offering low interest rates for an introductory period of time – go for those that have the best long-term deal and no annual fee.
Beware: Some credit card issuers may let you charge more than your credit limit. Then, they’ll charge you a fee because you exceeded that limit. It’s up to you to be aware of your available credit if you want to avoid a fee. Be aware that you may also pay fees for late payments.
Cash advances from your credit card can be quite costly, too. Interest is charged from the date of the cash advance and you usually pay a special cash advance fee. Let’s say you take a cash advance of $300 and are charged the average fee of $10.00. At the same time, you’ll pay interest (about 18.5 percent depending upon the card). If you pay the advance in full 25 days after taking out the advance, you will have paid an approximate interest rate of 34 percent for the advance. Legal? Yes. Smart? Definitely not.
If you feel you are having difficulties managing your credit, there are a number of resources to get help. You can call the National Foundation for Consumer Credit (1-800-388-2227), InCharge Institute of America (1-888-394-3687), Myvesta (1-800-680-3328) or Money Management International (1-888-762-2271). You can visit The America Consumer Credit Counseling Web site at http://www.consumercredit.com.
For more information, contact Elisa at the CSU Moffat County Extension Office, 539 Barclay Street, 824-9180.