Avoid credit card traps
If you're like most Americans, offers for credit cards arrive
in your mail on a daily basis. Why are credit card companies so
eager for your business? There are many reasons.
Credit cards, for one thing, are not free cash. Funny enough,
many customers think of them this way, and that--aha!--is how
credit card companies make their money.
You'll notice when you read through the fine print about credit
cards that there are varying APRs, or annual percentage rates.
This refers to the amount of interest you'll pay on credit card
charges if you don't pay your monthly balance in full. Think
about the last time you went shopping. Did you look at the tags
and make sure everything you bought could be paid with your
monthly paycheck? If not, you are a credit card company's dream
come true. You see, these companies bank on the chance that
consumers will use their credit cards to buy more than they can
actually afford at the time of purchase. When the bill comes and
it can't be paid in full, the customer pays interest on this
borrowed amount, and that interest accrues daily. This money
goes right into the credit card company's bank account. With
thousands of customers falling into this predicament on a
monthly basis, you can see where the companies get rich quick.
But how can you avoid falling into the credit card trap? A
little forethought and budget planning can help you prevent
paying interest and still allow you to benefit from credit card
perks.
Take mileage credit cards, for example. Most airlines offer
credit cards that earn you frequent flier miles based on the
number of dollars you spend. Enticing, right? Sure. Just be
careful to know how much you are able to spend in a month, and
don't let yourself go over the top. It's easy to check your
credit card balance online or by telephone. Know when the
closing date is for your monthly statement, and make sure you
stay below your limit. That way you can take advantage of the
bonus without digging yourself into a rut.
Speaking of the credit card rut, let's go back to that interest
thing. Did you know that interest, if left unpaid, also accrues
interest? Take a look at this example. You have racked up $10 in
interest on your credit cards in one month, based on a balance
of $100. (This assumes a 10% monthly interest rate.) Because you
leave that unpaid, the next month's interest accrues on the new
balance of $110. That means the next month you owe an additional
$11! That's a $21 total fee for your $100 in purchases. Did you
really find a bargain when you bought that jacket at 20% off?
Probably not.
If you buy responsibly and keep track of your purchases, you can
avoid credit card traps. Be a smart consumer, and credit cards
can work in your favor.