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Credit cards have gotten a bit of a bad rap. With so many people drowning in credit card debt, and with penalties and fees piling up to keep them there, it’s not too hard to understand. But that doesnít stop us from applying for cards and using them.
Credit cards themselves are not so bad. In fact, they have many good points. They make it possible for us to buy things and use them right away, and make payments later. They keep us from having to carry large amounts of cash when we plan on making big purchases. And they provide a way to build up our credit scores. When used responsibly, they can be an asset rather than a liability.
Unfortunately, many consumers fail to maintain control of their charging habits. They use their credit cards to make impulsive purchases. They pay only the minimum payment each month, resulting in greater interest charges. They keep their cards perpetually maxed out. Or they obtain multiple cards and juggle debt instead of paying it off.
To get the most out of credit cards, its best to start out on the right foot. Shopping around for a card with low interest and no annual fee will help minimize costs from the get-go. And if you resist the urge to go out and buy anything and everything you want, you can avoid accumulating an overwhelming amount of debt in the first place.
Here are some tips for keeping a leash on the credit card monster:
* Pretend your credit limit is about 25% of the actual amount. This is the optimal balance for keeping your credit score at its best. It also helps keep your debt much more manageable than if you utilize your entire credit limit.
* When using your card to purchase non-necessities, pay the balance in full each month. Or at the very least, make sure you can afford to pay the purchase off within a few months and avoid charging any other wants until you do. Charging lots of stuff we do not need is a trap that too many cardholders fall into. By charging only what we can afford to pay back quickly, we can avoid getting in over our heads.
* Always make more than the minimum payment. If you only pay what you are required to pay, it could take years to pay off even a small balance. Try to put as much money as you can toward your bill each month, and you could save yourself a small fortune in interest charges.
* Avoid impulse buying. When you see something you want (or feel that you need), give yourself some time to think about it. For small purchases, a week should be sufficient. For more expensive things, give it a month. By then, the urge may pass. If it doesnít, make sure you can afford to pay off the balance in a reasonable amount of time before you take the plunge.
* Resist the urge to use your card to pay bills, unless you are paying the balance in full each month. If you cannot afford to pay your bills without the plastic, you need to re-evaluate your budget. Charging them to your credit card will only leave you with loads of unnecessary debt.
When used improperly, credit cards can be a real nightmare. But when used responsibly, they can make our lives easier. By charging with prudence from the start, you can avoid the debt trap and maintain a good credit score.
If you’ve ever been hit with an unexpected expense, you know that you need some source of funding to fall back on at all times. A savings account makes the most sense, because it gains interest. But many consumers use their credit cards as a safety net, even though they know it will cost them more in the long run.
Those who are saddled with credit card debt, either because of using them for emergencies or simply overusing them, are painfully aware of how interest and fees accumulate. They swear that when they get out of debt, they will start saving money to avoid having their finances fall back into ruin. And if they’re serious about it, they might put every spare dollar toward paying down that balance.
Paying off high-interest debts has definite advantages. Most importantly, it can save you lots of money over paying just the minimum payment each month. It also frees up your credit line so that you can use it if you have to. But is paying down credit card debt more important than building up savings?
There is some disagreement among financial experts. All agree that your bottom line is positively affected by paying as little in interest as possible. And some find that to be reason enough to put money toward paying down your balance before you try to save up. But others feel that the importance of having an emergency fund trumps the money saved in interest charges.
One argument against paying off credit cards before starting to save is that it leaves no resources to use in case of emergency except for the credit card. If you’ve paid down your balance sufficiently, you may be able to use the card if something comes up. But you’ll also experience a setback in paying it off. That means you’ll pay more in interest, and it will be longer before you can start that savings account.
By the same token, using a credit card for emergencies is one of the habits that those with debt issues need to break. Putting yourself in a position in which you have no choice but to do so is a step in the wrong direction. By saving up an emergency fund, you can avoid using credit until you’ve eliminated the debt you already had.
Choosing between paying off credit card debt and building up a financial cushion can be difficult. But if unemployment or some other major financial problem is a possibility, building up your savings is usually the best option. Putting away at least a months salary before you start paying off your debt will allow you to breathe easier.
Credit cards offer a number of benefits. They give us easy access to credit in emergencies. They make it easy to pay for the things we need and want. And when used responsibly, they can build up our credit. But they can also be very expensive, especially when we have to pay penalties.
Credit card companies issue penalties in various forms. These include:
* Late fees : When we’re late paying our phone bills or electric bills, the company often tacks a late fee onto our next bill. The same holds true for credit card companies. The difference is that the fees from credit card companies are usually much, much higher. It’s not unusual for them to charge late fees of up to $39.
* Overlimit fees : Most credit card providers will not allow debtors to charge purchases in excess of their credit limits. But if your card is maxed out, interest charges could push your balance over the limit. For each month your balance is over the limit, the creditor can impose an over limit fee.
* Penalty interest : Most credit card contracts include a provision that allows the company to raise your interest rate if you are late with your payment. In most cases, interest will not be raised until you’re late twice in a 6- to 12-month period. But the default rates are often two to three times your normal interest rate.
* Universal default : A growing number of credit card companies are raising interest rates for customers who are late with payments not only to them, but to other creditors. This is called a universal default rate. Even if you pay your credit card bill on time every month, a misstep on another debt could result in a rate hike.
* NSF fees : If you make a payment and it doesn’t clear your bank, your credit card company can add a non-sufficient funds fee to your bill. This is in addition to late payment and over limit fees that may result from the denied payment.
* Annual fees : An annual fee isn’t technically a penalty, but it is something to watch out for when you apply for a card. Some creditors charge annual fees of $50, $75 or $100 or more. There are plenty of cards out there without annual fees, so in most cases it’s best to just pass the ones that do charge them by.
Knowing the Penalties for Your Credit Cards
Credit card issuers are required to disclose all penalties and fees that are or could be charged on credit applications. They may also send a copy of this information to new cardholders. And this information should also be provided on each credit card statement. You will have to read the fine print, but creditors are required by law to provide this information.
If you incur a penalty, you may be able to get it reversed. If it’s the first time you’ve been late with a payment or a bank error has occurred, a call to the credit card company may resolve the issue. But if you habitually make late payments or exceed your credit limit, the creditor is unlikely to be helpful.
Penalties can cost you a great deal of money. Whether they’re one-time fees or interest rate increases, they can eventually add hundreds or thousands of dollars to your balance. Paying attention to these fees and making a conscious effort to avoid them will enable you to pay off your balance much sooner and allow you to keep more of your hard-earned money.
