Plastic: Power or Peril?
If you don't have enough green when you charge, you'll end up seeing red.
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Being smart about credit
involves more than just picking the right card. You can be diligent about choosing a card with no annual fee, a long
grace period, and the lowest annual percentage rate (APR)
on the market, and still run up thousands of dollars of debt.
What can really get you into trouble with credit cards is how much you charge, or more precisely,
how much more you charge than you’re able to pay off. Whether or not you stay ahead of the credit game depends
on how you handle some all-too-familiar situations.
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MONEY DOWN…AND OUT
A lot of credit card spending is done on the spur
of the moment, when you haven’t planned on buying, but something
strikes your eye.
If you find shopping hard to resist, one solution
may be to leave your credit cards at home most of the time, so that they're
not handy. If you reserve using credit for those transactions you can't
handle with cash, a check, or a debit card, you may find you spend less.
IT’S NO BARGAIN
One of the best uses
of credit — the ability to buy things at a good price even if you don’t have the cash on
hand — can also create a financial nightmare if you do it too often.
For example, what if there’s a huge sale at a
store where you’ve had your eye on a new piece of electronic equipment,
a new winter coat, or something as essential as a washing machine.
There’s no question that getting 40% — or whatever — off
the full price is a good deal.
But if that extra charge on top of your typical credit
card balance is more than you can repay, you may be digging yourself into
a hole. And the more often you add a major purchase, the larger, or deeper,
the problem can get.
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DANGER IN STOREOften, when you’re shopping at a retail chain
or department store, you’ll be offered a chance to apply for a store
credit card, usually with an opportunity to save money on your current
purchase or to take advantage of other savings in the future. This can
seem like a good deal when you’re standing at the checkout counter,
and it can even be a good deal sometimes. But don’t forget what it
will mean for you down the line.
First of all, store cards often have higher APRs than
other credit cards, sometimes as high as 29.99%. And it’s a fact of life that people tend
to spend more using a card than they do if they’re spending cash.
The lure of an additional 10% or 15% savings the store offers you to open
and use your account can tempt you into spending more than you might otherwise.
In addition, taking on multiple cards — and their
credit limits — can make you look like a credit risk to future
creditors.
You can appear to be overextended even if you never use the cards after
taking advantage of the initial offer. Surprisingly, even canceling the
cards you’re not using doesn’t necessarily improve your credit
standing.
And while it may seem inconsequential, the more bills
that arrive during the month, the harder it can be to stay on top of all
of them, even if the total amount you charge isn’t huge.
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THE BARE MINIMUM LEAVES YOU EXPOSED
What you charge each month becomes all too clear
when your monthly statement arrives and you see how much you owe. There
are basically two ways to deal with your debt: You can pay all or at least
a substantial portion of your balance. Or you can make the minimum payment,
which can be as little as between 3% and 4% of what you owe. Lenders, by law,
must make the minimum payment large enough to cover the
interest
and at least a portion of the
principal.
While paying the minimum keeps you out of trouble
with creditors, it’s more costly in the long run, since you’ll
always be paying interest on a large amount, which doesn’t decrease
very rapidly. For example, suppose you pay the minimum balance of $10
on a $300 purchase you make with a card that has an 18% APR. You won’t
pay off that debt for three years, and the total cost will be more than
$390 — almost one-third more than the original price. And if you
charge any other purchases on that card in the three-year period, you'll
owe finance charges from the day the transaction goes through.
If you pay $50 a month, it will take you only seven
months to pay off the purchase and will cost $311.88 in total. You might
consider that a reasonable price. And, of course, if you pay off the whole
$300 when you receive the bill, it won’t cost you anything for the
convenience of using the credit.
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