How much do your credit card purchases really cost you? If you’re not paying in full each month, that burger, cappuccino or tank of gas you bought this week may take you a couple of years to pay off. Today, credit cards are a huge part of our lives, just “swipe and go”! You don’t even have to think about that money until you see it on your statement a month later, and even then—heck, if your paycheck didn’t come in time, the credit card company will cover it and you won’t have to worry. In fact, on average, you’ll just have to make a small payment of around 2.5% of the balance; leaving you plenty of money to spend on something else.
You and I probably have around 5-6 credit cards we use regularly. That includes bank cards like Visa or MasterCard, department store cards, gas cards, etc. It seems there is a credit card for pretty much anything! Just think, if each one of those credit cards has around a $2,000 line of credit, that means we have around $10,000-$12,000 available to us on average to go out and spend at any given time. WOO HOO! You find something you want, but you don’t have the cash—just charge it! Sounds great!...but have you ever thought of how long it will take you to pay it back, and just how much that $2,500 Mac Book Pro will actually cost you 16 years from now?
The next time you put a purchase on your credit card and think about just paying the minimum when the bill comes…think again. When you make just the minimum payment, you’re also paying a little friendly fee, called interest. It doesn’t seem like much, and sometimes it’s simply the cost of a couple items on “Mickey D’s” dollar menu; but what those few “dollar menuaire” items add up to is a balance that takes longer to pay off. You’ll also be paying a lot more than you spent in the first place. Consider this…that $2,500 Mac Book Pro at 15% interest with a minimum payment of $10 would take you 16 years to pay off—costing you a whopping total of $4,688.04; $2,188.04 more than the price tag!!! BUT, if you decided to pay more than the minimum, up’ing your payments to $100 a month, it would take a little less than 3 years and only $492.22 more than the price tag. Now that’s a better option!
Ideally your credit card payments should be paid in full each month, but yes, some situations arise when you just HAVE to have something shiny and new or an emergency comes up and you just can’t make the payment in full. We’ve all been there. These are the cases, however, where you should make sure you are paying as much as you can each month rather than just paying the minimum as noted in my example. Now if you’re heading off to college and you “really need the money!” look into taking out additional student loans. They’ll be friendlier to your budget and credit score than a big credit card balance. Just think of it this way, the 5.99% rate on your student loan is your friend, the 15% rate on your credit card is your enemy.
Credit cards seem like such an easy thing, especially when you get about 5 credit card offers in the mail every week! But don’t let them fool you; you have to know how to manage them to make them work for you.
Try following these easy tips to stay on top of your credit cards:
- Keep the number of credit cards you open to a minimum; 2-3 is really all you need!
- Beware of cards with super-low introductory rates, such as those beautiful 0%’s flying around. They’re great for the first year, but what happens when the 12-month term is over? If it goes un-noticed, you could start paying 24%. If you do go with a low rate, keep a detailed calendar with a big reminder!
- Stay away from cash advances. When you use your credit card like a debit card you’re likely to pay more in interest and you won’t get a normal grace period.
- Consider a debit card. It works like a credit card, but the money is coming right out of your checking account; no interest, no debt, no outta control spending!
- If you can’t pay in full, pay more than the minimum. I just can’t stress it enough! Don’t let spending more than you can afford become a habit.
- Don’t use your credit card for loans. Generally, the interest on a credit card is much higher than the loan you’re paying!
- Set up an automatic withdrawal from your savings or checking account to pay your monthly bill to stay organized. Paying a late fee is the least of your worries, the mark that goes on your credit report however, will follow you for about seven years.
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