Interest will sneak up on you
When you buy things on credit you pay interest, which keeps building over time if you don’t pay off the full amount. If you’re not careful, you could end up paying for that new computer or car stereo for years, and it could cost you hundreds of dollars more than you thought. Consider these basic purchases charged at the average 18% interest, with only minimum payments made every month:
Purchase |
Interest Paid |
Total Cost |
Years to Pay off |
Minimum Pmt |
iPhone ($300) |
$59.45 |
$359.45 |
2 years |
$15.00 month |
Laptop ($1500) |
$785.41 |
$2,285.41 |
5 years |
$38.00 month |
Ski weekend ($850) |
$348.50 |
$1,198.50 |
4 years |
$25.00 month |
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Minimum payments are a maximum hassle
That’s because you’ll virtually never pay off your account, and you’ll always be paying a lot more for your purchases than they actually cost. Plan to:
- Only buy things you can pay off in a month or two
- Only use your card for emergencies
- Make at least twice the listed minimum payment if you get off track and charge more than you intended
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Remember your credit limit
Your credit card limit is the most you’re allowed to spend, not how much you should spend. When you reach the limit, you’ll
be denied further charges, and it gets even harder to pay down. It also counts against your
credit report when your balance is maxed out.
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Uncover the hidden charges
The fine print on credit card applications can get pretty interesting. Often, what looks like a great deal brings with it lots of hidden costs and what the banks refer to as “transaction fees.” Here are some common extra charges that build up quickly:
- Late fees: Make a late payment, pay a late fee -- sometimes equal to the minimum monthly payment
- Annual fees: A yearly charge just for having the credit card, generally around $25 - $50
- Over-limit fees: A penalty charged for being over your credit limit
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Don’t take cash advances
Getting cash from your credit card when things are tight may seem like a great deal, but usually those cash advances come with strings attached. It’s another way for the company to charge you a transaction fee, and usually you pay a higher interest rate on the advance than you do on regular purchases.
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How many cards is too many?
The best plan is to stick to one card with a low limit that you plan to use only for emergencies or purchases that you can pay off every month. If you have trouble staying with that plan, you may need to watch your spending more closely and cut back before you get too deeply into debt.
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