Many people consider themselves smart shoppers, but wouldn’t hesitate to use a credit card to make everyday purchases. The convenience of owning credit cards cannot be overstated. The option to purchase without having to carry cash, or to purchase online quickly and easily is, like the Mastercard ad says, “priceless!” But how smart is it to purchase an item on sale, clearance or with a discount coupon, pay for it with a credit card, and then carry a balance on that item for months, or possibly years?  Not very!

Carrying a Balance Costs You

My husband and I incurred some credit card debt after losing our jobs in 2007, when for a time, we used our credit card as an emergency fund.  In order to accomplish debt reduction as quickly as possible, I was able to transfer the balance at the low interest rate of 4.99% until the balance is paid.  The balance on the card is approximately $9,500, and minimum payments are currently $131.66, which is interest plus 1% of the balance.  If I make only minimum payments, it will take 26 years to pay it off, and we will end up paying a whopping $23,518!  Keep in mind that our interest rate is much lower than the average.  If you have a credit card with a rate of 15% with the same balance, it will take over 30 years to pay off and you will end up paying $37,806!  In the end you pay over $28,000 more for the items you’ve charged on that credit card.  If you have several credit cards, imagine how much money you would lose in interest payments in your lifetime.  How much interest are you paying?  Your credit card statement will tell you how much you’ll pay by just making minimum payments, or calculate your interest here.

Be Careful With Credit

Here are some tips on the responsible use of credit cards:

1. Try not to use the credit card unless you can pay off the balance when you receive the bill.
2. If you know you’ll be carrying a balance for a period of time, shop around for the best interest rate you can get.
3. If you transfer your balances to a 0% interest rate card, make sure you can pay off the balance within the promotional period. If you are given the option to take a low interest rate for the life of the balance, that is most often a safer alternative.  Continuously transferring balances from card to card has a negative affect on your credit score, and will cost you more in balance transfer fees which are typically 3%-5%.  There is also a good possibility you could get turned down for additional credit.
4. If the store offers a card with an interest free period for a large purchase, and you don’t pay it off by the end of the promotional period, you could owe thousands in deferred interest.
5. If you are carrying a balance, no matter what the interest rate, always make more than the minimum payment.
6. Stay away from store cards which carry interest rates in excess of 20%.  If you sign up for a store rewards program, don’t make purchases unless you can pay it off when you receive the bill.  Those programs can be a trap, encouraging you to purchase more than you would otherwise to get coupons and other perks.

One or two credit cards used wisely can be a enormous convenience, but the misuse of credit can drain your family’s resources and compromise your ability to achieve financial security.  Be honest with yourself when determining if you have the discipline to use credit cards in a smart way.

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