Preserve your good credit rating
Credit cards are your passport to the world of electronic commerce. Without one, you're grounded. To avoid credit-card abuse, try the following tips.
•Pay as much as you can each month. The minimum payment is enough to keep your account in good standing, but it's not enough to make a dent in your debt.
•Stay below your credit limit. If you exceed the limit, the card issuer may just give you a higher limit, but your credit rating will suffer.
•Stick with one or two cards. If you carry a balance, don't keep applying for new cards with higher limits or lower rates.
•Contact the card issuer if you can't make a payment. Don't miss more than two months in a row.
How you could end up paying twice
It's tempting to pay just the minimum amount when bills pile up. You can do it once in a while, but you'll get into trouble if you do it every month. By paying only the minimum, you will extend the repayment period for many extra months. That will raise the cost of your credit card purchase; it could double the cost.
Suppose you buy a leather jacket for $1,000 and put it on a credit card with an 18.5 per cent annual rate. You have no other debts and you pay the minimum, say three per cent of the balance each month. At that rate, you will take more than 10 years (122 months) to pay off the balance, and your total interest paid will be $842.90. That $1,000 leather jacket will end up costing you $1,842.90. If the minimum is only two per cent, you'll take more than 20 years (248 months) to discharge the debt. You will pay $2,144.83 in interest, thus tripling the cost of your purchase. Credit-card companies don't want you to know this. They're happy to let you keep paying the minimum. But it's dangerous to your financial health. There are two ways to reduce interest costs on your purchase of the $1,000 leather jacket: pay off more of the balance each month, or switch to a lower-rate card. If you pay 10 per cent of the monthly balance, you'll discharge the debt in 37 months with an interest cost of $173.48. And if you pay a fixed amount of $100 a month, you'll whittle that down to 10 months and $84.79 in interest.
The effects of a lower interest rate
Now look what happens when you switch to a credit card with a 10.5 per cent interest rate. By paying a flat $100 a month, you'll be debt-free in 10 months at an interest cost of $48.12. A low-rate card saves you money even if you pay just the minimum. If you use a card with a 10.5 per cent rate and pay three per cent of the monthly balance, you'll get rid of the debt in 91 months with an interest cost of $337. That's a considerable improvement from the 122-month repayment period and $842.90 interest cost you'll incur when you use a standard card with an 18.5 per cent interest rate.
Your credit rating will suffer if you have too much debt and you're paying only the minimum monthly amount, or if your credit-card balances are close to the limit. It's worth checking your credit report periodically to see how you're doing.
