Financial Literacy Month: Credit Cards

by Matt B

Horray! You just turned 18, now you can…hmmm….You have been driving for a couple of years, you can not drink (legally) for a couple of years, I guess you could buy a cigar or cigarettes but where is the fun in that? At least you are old enough to get a credit card. The bad part is, you have no idea how to use credit responsibly and this may affect your life more than any other “perk” that comes with age.

I speak from years of experience and debt. I should not have gotten a credit card at the ripe old age of 18. I knew better than to charge cd’s, dvd’s, gas, road trips and whatever else I was throwing money away on during my younger years. I had all of the proper knowledge, I guess that some of us just have to learn the hard way, I just wish that I wasn’t one of “us”.

I am of the mindset that credit cards are a valuable tool that can help us achieve our financial goals. Some will chastise my view and argue that credit cards will be the bane of my existance. That may be true, if I had not learned the proper way to manage my credit and use cards responsibly.

No more than two cards-
For many people, even one card is overkill. You do not want too much credit extended to you. Even if there is no balance, having too much available credit can be a bad thing when applying for loans or a mortgage. In my opinion, both of your cards should be major credit cards, store cards often have astronomical interest rates and the tendancy to shop at that particular store will be 3x as high. Not to mention that consumers spend more than twice as much on credit as they do with cash.

Pay your entire balance-
The habit of using credit cards becomes somewhat of an addiction. Before too long, purchases fly under the radar and you find yourself unable to pay the entire bill at the end of the month. Interest creeps in on you and before you know it, you are using the card for the simplest of purchases, which you should be able to handle with cash. Regardless of how, it is important that you keep up on your purchases and pay your balance every statement. If you can not do this, you should not be using credit cards. It’s that simple.

Do not use credit for large purchases-
This is such a simple concept, but for some reason, people just do not get it. That 60 inch TV is tempting, but if you plan on making payments on it, stop. For example’s sake, let’s say that you want a TV that has a final purchase price of $4,200. If you use your credit card and make payments, this purchase will still cost you more than you are probably willing to pay after the interest is calculated. For this example, let’s say that your interest rate is 18%, not that great, but far from the worst interest rate that I have ever seen. Let’s also assume that you are willing to make a sizable monthly payment of $400.

Month

Fixed Payment

Interest Payment

Principal Paid

Remaining Balance

1

$400

$63.00

$337.00

$3863.00

2

$400

$57.95

$342.06

$3520.95

3

$400

$52.81

$347.19

$3173.76

4

$400

$47.61

$352.39

$2821.37

5

$400

$42.32

$357.68

$2463.69

6

$400

$36.96

$363.04

$2100.64

7

$400

$31.51

$368.49

$1732.15

8

$400

$25.98

$374.02

$1358.13

9

$400

$20.37

$379.63

$978.51

10

$400

$14.68

$385.32

$593.18

11

$400

$8.90

$391.10

$202.08

12

$205.11

$3.03

$202.08

$0

This means that you just paid $405.11 in interest for this TV that you just had to have. If it had paid $200/month instead of $400, you would pay $882 in interest. You get the point. (Thank you to Credit Card calculator at Bankrate for the numbers, it would have taken me a while to do the calculations myself).

It is hard to think long-term when we see something that we really want, but fighting the urges can save thousands of dollars and countless headaches. Responsible budgeting and spending will lead to wealth and prosperity in the long term, so for the short term, if you can not control your spending habits, just do not use credit car
ds. If you are in control, credit cards can be a benefit to you.

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