Convenient or cruel?
The truth behind credit cards and how they help (and harm) you
By Brian Styrwoll/Contributing Writer
Perhaps nothing signifies the American way of instant gratification more than the credit card. That tiny plastic lender in our wallets is constantly and subliminally whispering, tempting us to buy now and pay later.
Sadly, all too many people have fallen into the credit trap, failing to acknowledge the “pay later” side of the equation.
At any given time, 89 percent of Americans carry at least one credit card, and added together Americans are more than $1.266 trillion in debt to creditors. That’s $5,000 for every man, woman and child in the U.S.
So what, short of faking your own death, can you do to rid yourself of debt?
First, pick the right source of credit.
Some cards do carry hidden fees, and they can easily add up to a high cost of instant gratification. For example, many cards charge a fee to obtain a cash advance, and others charge penalties for late payments or for exceeding your credit limit. The bottom line? Read the fine print and know what you’re getting into before you sign your life away.
Yes, the fees can nickel and dime you to death, but that’s not the real cost of credit.
In addition to the monthly fees and penalties, there is the interest rate, or finance charge. This, more or less, is the monetary cost affixed to the risk and service of lending. This is what you will be charged against your outstanding balance, or the amount borrowed and left unpaid at the end of each month. This can be the killer.
For example, say your have borrowed $5,000 on a card with 15 percent interest, a common rate. Each year that your balance was unpaid, that’s another $750.
Let’s say that you have $4,500 balance on a card with an 18 percent interest rate, with a minimum monthly payment of 2 percent. If you paid the minimum each month, this debt would last for 44 years, and will end up paying $12,431 beyond the initial $4,500 in interest. Suddenly instant gratification is not nearly so attractive.
Not to say that credit cards as a whole are bad. They do offer convenience, and can be a powerful tool for money management. They help you keep track of spending with monthly statements. They also can give you the immediacy to take advantage of special offers, even when you don’t have any cash on hand.
Credit cards can provide you with the security of always having funds available in case of an emergency, and they give you an added sense of consumer security, as you have the right with a credit card to refuse payment on purchases you are not satisfied with. Also, your liability to theft is greatly limited by law with a credit card.
Minnesota Attorney General, Mike Hatch, regularly publishes “The Credit Handbook,” which is a layperson’s guide to understanding and managing credit. In it, he discusses the meaning of credit, how to use it effectively and how to stay out of debt. Here are some pearls of wisdom from the handbook, to help you learn to manage credit more effectively:
- Pay off your balance as quickly as possible. Paying back towards a card with a finance rate of 18 percent is just like getting an 18 percent rate of return on your money, which is a good overall investment.
- Remember that every time you use a credit card, it is just like taking out a loan. It will have to be paid back sooner or later.
- Don’t ever give out your credit card numbers to anyone, especially not over the phone or the Internet.
- Save receipts for everything you purchase, and check them against your credit card statement each month.
- Set budgets and follow them.
- Decide what is more important to you in a credit card, no user fees or a low finance rate. If you believe you will pay off your balance every month go for the user fees. Otherwise, look for a card with a low finance rate.
- Make an effort to be able to spend 20 percent or less of your income on paying down debts.
- Most importantly, be aware of the fees and restrictions on your account.
- Read the fine print. Don’t let the fees you didn’t know about get you later on.
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