First
introduced to the public in 1959, and used sparingly for their first few
decades, credit cards have become a fixture in our daily lives. From the
convenience of not having to carry hard currency to the luxury of buying
what we want, when we want it, credit cards promised a whole new world of
freedom. The concept of credit wasn't new, but credit cards have made the
process of getting - and using - credit to finance purchases simpler and
easier for millions of everyday people.
Unfortunately, such freedom comes at a price. Americans now carry more
than 225 million signature-based debit cards and have a whopping $800
billion in outstanding credit-card balances!1 If you're like most people,
you probably have at least one credit card, if not a half dozen. And you
probably carry a balance on at least one account, paying monthly interest as
you go. If so, you may be shortchanging your financial future in exchange
for a few consumer goods in the present.
How
Revolving Debt
Works
If paid off
monthly, credit
cards are simply
a convenient way
to consolidate
purchases into
one billing
entity, the
company issuing
the credit card,
and making a
single monthly
payment.
Although the
company might
charge a small
annual fee, such
use sidesteps
any interest
charges or card
usage fees.
When credit
cards are not
paid off
monthly,
however, they
become similar
to loans from
the bank in that
they carry
interest
charges, minimum
monthly
payments, and a
term for paying
off the balance
completely.
Credit card
companies
frequently
charge
double-digit
interest rates
on outstanding
balances. That's
a steep price to
pay for
convenience and
the ability to
make impulse
purchases!
Think
ALL the Costs of
Credit
In selecting,
or keeping, a
credit card,
make sure you
know and
understand all
the costs,
rates, and fees
involved.
Annual fees -
many credit
cards charge an
annual, fixed
fee just for the
privilege of
having credit
extended to you
from the company
sponsoring the
card. Annual
fees can often
be avoided
entirely by
shopping for a
credit card that
guarantees no
annual fee.
Finance
charges -
finance charges
vary widely. If
you plan to
maintain an
outstanding
balance on your
credit card,
make sure to
find the best
interest rate on
a card that
meets your
needs. Many
cards offer you
a low "teaser
rate" for a
specified
period, then
dramatically
increase the
rate you pay on
outstanding
balances. Some
base your
minimum monthly
payment on a
loan term that
if the minimum
payment is made
consistently,
could keep you
in debt for 40
years or more.
Tax treatment
of interest -
unlike the
interest paid on
most home
mortgages,
second
mortgages, and
some home equity
lines of credit,
the interest
paid on credit
cards is not
deductible from
your taxable
income.
Fortunately,
there is a great
deal of
regulation of
credit cards
requiring full
disclosure of
all relevant
credit terms
being extended
by the card
issuer. Be
careful to
review all
credit
documentation
thoroughly
before selecting
a credit card
for regular use.
Another
Alternative:
Debit Cards
One
fast-growing
alternative to
credit cards is
a "debit card."
This type of
card is not a
credit card at
all; instead, it
simply gives you
card-based
access to your
bank savings or
checking
account. A debit
card gives you
the convenience
of not needing
to carry cash,
or even checks,
but you must be
mindful that
when used your
purchases are
being deducted
directly from
your existing
account - once
the account is
empty, the card
has no
purchasing power
until you make
another deposit!
How you use
credit says a
great deal about
your style of
money
management. If
you would like
to learn ways to
reduce your
dependence on
credit, pay down
current debts,
and save or
invest that
money instead,
we'd be happy to
show you how.
1)
CardWeb.com Inc.
(www.cardweb.com)
301-631-9100
