Plastic: Power or Peril?
If you don't have enough green when you charge, you'll end up seeing red.
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.
If you wait to use the card until your statement has been prepared, any new charges won't be due until the following billing cycle, giving you time to put money aside.
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.
DANGER IN STORE
Often, 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.
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.
THE BARE MINIMUM LEAVES YOU EXPOSED
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.