Credit cards:The good and THE BAD

In today's society we depend on credit cards for a variety of reasons. A credit card allows you to purchase items or subscribe to services on-line or by way of telephone. A credit card also facilitates the booking of hotel rooms, rental cars and other travel related needs. These are merely a few of the advantages of a credit card. The challenge with credit cards however is the impact a credit card has on an individual's money management skills. A credit card allows someone to purchase something today that they may not have the cash for otherwise. This is where people with money management challenges or limited experience handling credit can run into problems.

If you buy something today using a credit from a credit card (especially with ones with high interest rates) you need to be certain you will have the funds to pay for the item in full when the credit card statement comes in. If you only make the minimum payment and are unable to pay for the purchase in full upon receipt of the credit card statement you will be charged a high rate of interest which will make your purchase more expensive. Potentially much more expensive.

For instance if you buy an MP3 player for $100 and charge it to your credit card on September 20th and the statement date is September 27th you would typically need to have the funds to pay for the $100 charge by October 20th depending on the credit card terms. If you have the $100 and pay your bill on time without leaving any balance you will pay no interest for the item. If you do not have the money to pay the bill when it is due then you will be charged interest. A rate of interest not uncommon with credit cards is 24%. If you are charged 24% interest and do not have the $100 for the original purchase and the interest which has now been charged within one year you will have added 24% to the cost of the item purchased, and, in four years you could have purchased two $100 items but instead that money would be needed to pay for the original purchase. The interest costs associated with credit card purchases directly diminish in after tax dollars your future buying power.

Another example of how credit card debt can grow to a point where it is unmanageable is a credit card with a balance of $5000 and an interest rate of 29.9 percent. With a three percent minimum payment of $150 per month the credit card bill will take over 50 years to pay and the consumer will have paid more than $23,000 more than the original $5000 spent. It is much easier than we think to get to a balance of $5000 and the task of repaying can become daunting.

While many people are sensitive to the risk of credit card debt it is surprising how quickly people can get caught up and fall behind. It is also quite concerning for our youth who are provided with credit cards in university and college when money is tight and future expectations of earning power may encourage students to run up their credit cards only to face some dreadful realities when they complete their schooling with both outstanding student loans and credit card obligations.

Some tips for managing your debt include reducing your limit on your credit card. Complete a monthly budget and know in advance how much money you will have to pay a credit card bill monthly. And reduce it by ten percent. Then keep track of every charge to your credit card. Check your credit card bill online frequently and make sure you stay within ten percent less of your budget to ensure you will have the money to pay the statement in full when it comes in. Alternatively, don't use a credit card!

I highly recommend to anyone using a credit card, at the time of a transaction, ask yourself if you will have the funds to pay for the credit card bill in full when it is due, if not, defer the purchase and wait until you know if you had to pay for the item in cash you could.

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Written by: Deanna Natale