DEBTS: CREDIT CARDS

Welcome to Money March. We are continuing our discussion about taking control of our money and making it work for us. If you missed any of the other discussion, check them out here: HOW TO TRACK YOUR EXPENSES, WHY YOU SHOULD TRACK YOUR EXPENSES, HOW TO START SAVING MONEY, and HOW TO TRACK YOUR SINKING FUNDS. Check out these discussion and look for your FREE PRINTABLES.

A lot of the advice I have given so far has been about taking control of your money by saving and tracking what you already have. While this part is easy, and can be fun if you are a nerd like me, I feel like I have to address the not so fun part of our budgets…our debts.

Now, maybe you are just starting out on your own and you have no debts. If so, BRAVO!! This is amazing! There are different views on debts, but in general, if you aren’t educated with your money in the first place, you are probably going to be more inclined to incur debts. This is because the environment around us is really debt friendly. You know the taglines from all the credit card commercials as much as you can recite a Geico commercial! You hear all the time about the “points” and “rewards” you can get from credit cards, offering free trips and merchandise all year long. Credit cards seem like the only way, sometimes, to live the lifestyle you want to live. Even if you aren’t worried about “keeping up with the Joneses,” (Check out more about MONEY PERSONALITIES here) you will have some sort of emergency at some point that you cannot afford and can easily get a line of credit to solve that problem.

This all sounds like a positive aspect of credit cards, but there are many negative aspects as well. Personal loans, auto loans, home loans, and student loans also can have a large benefit (that is why so many of us owe so much!) but they all have a downside as well. Let’s check out the pros and cons of credit cards so that you can make the right decision for you!

CREDIT CARDS

Credit cards can seem like a necessity. Our credit scores, which are used for everything from getting a job to getting a place to live, depend on our use of debt. Credit cards (or revolving lines of credit) are a useful tool to build your credit score, but if you don’t know how credit cards work, they can drag you into a pit of despair for YEARS to come. (To learn more about building your CREDIT SCORE, click on the link).

Pros of credit cards:

• Building your credit score. As I said above, using credit cards the right way can help build your credit score.
• Rewards. Many credit cards offer rewards or use a point system to offer you discounts, free merchandise, free trips, etc. This can be a great incentive to use your card more often, which benefits the company, but if you cannot afford the debt you need to reach to gain those rewards, is it really a benefit to you?
• Convenience. Most major retailers and online retailers accept credit cards to pay for purchases. I can’t tell you how many time “Buy Now” on Amazon has gotten me in trouble with my budget!
• Cash Advances. Many major credit card companies offer cash advances, but make sure to read the fine print about what they will cost you.
• Purchase Protection: Using your credit card offers protection against fraudulent charges and identity theft. You can easily dispute charges with your credit card company.
• Pay over time. The beauty of using credit cards is the ability to make payments over a long period of time. When our water heater needed replaced, we wouldn’t have been able to purchase a new one without using credit and making payments over time.

Cons of credit cards:

• Easy to overspend. This is the price of the convenience of having a credit card. It is very easy to spend as much as they will allow you, which isn’t always what you can actually afford. It is very convenient to pay now and worry about it later.
• Fees. Many credit cards charge annual fees for allowing you to use your card, late fees for late payments, cash advance fees, and fees for not using your account.
• Fraud/Identity theft. The reason you can get protection from fraud and identity theft is because it is very easy to steal someone’s credit card information.
• Fine print. Read your credit card fine print before signing up. There can be a lot of tricky wording in there that you may not understand and will not account for until it is too late. For instance, will you be charged extra fees for certain types of usage? Do you have a grace period? Does your interest rate go up after the introductory rate runs out? These are all things you need to understand before getting a credit card.
• Emergencies. Like my earlier example of needing a water heater that I couldn’t afford, credit cards can be good for emergencies, but what IS an emergency? Is it an emergency that we are at the checkout line and realize we don’t have enough money in our checking account? Is it an emergency if your and your friends are out to lunch and you want to eat something pricey?
• Interest rates. Okay, so this one is the most important, in my opinion. Not understanding how your credit card interest rates work will force you into making payments much longer than you expected. When you get your statement after making a purchase, you will see a lot of information spelled out for you. You will see your due date, the total amount owed, the minimum payment you need to make to keep your account open, and usually a small box with some information about how long making that minimum payment will take you to pay off. If you have a credit card, really look at that information. It might surprise you to see how much more money you are paying in interest the longer it takes you to pay.

INTEREST RATES:

Credit card interest works like this: You will see that each credit card has it’s own APR or annual percentage rate. This can be different depending on what card you choose and what your credit score is. The better your credit score, the lower your APR. Let’s say your APR is 20% (It’s never this easy, but this is just an example). Your first purchase is $1000.00. Your bill comes in the mail and it says you can pay the $1000.00 and be charged 0 interest OR you can make a minimum payment of $20. You make the minimum payment and no other purchases the next month. Your next bill comes in. What do you think it should be? $980.00? $1,176.00 (980+20%)?

APR is divided into either a daily rate or a monthly rate. Check the fine print to find which one your credit card uses. The billing cycle is usually 30 days. If you they are using the daily rate you take the APR divided by 365 (days in the year). 20% divided by 365 = .0005479. To calculate the daily rate, take the amount you owe (980.00) x .0005479 which equals. .536, or $0.54 a day. If you multiply $0.54 x 30 (days in billing cycle), that will equal $16.21 for the billing cycle. Your new balance is $996.21 (980+16.21).

If your company uses the monthly rate, you will divide 20% by 12 (months) and get .016. Then you just take the balance owed (980.00) multiplies by .016 which equals 15.68. Your new balance is $995.68 ($980.00+15.68).

If you only make the minimum payment of $20 again, either $15.68 or $16.21 (depending on daily or monthly rates) of it is interest only. That means that you are only paying $4.32 or $3.79 toward the actual amount you owe. Isn’t that ridiculous?? Your money is going into the pockets of a company, instead of the purchase you actually made.

I am not saying that you shouldn’t get a credit card. But you should definitely educate yourself as to what using a credit card will actually do for you. Is paying all that interest worth it to get the rewards? Maybe it is. Are you absolutely sure you are able to pay off the original balance before the 30 billing cycle is up? If so, you don’t get any interest charges added. You really need to know yourself before you can make this financial decision, as you can see that you may be spending the next 20 years paying off that original purchase!

As you can see, having a credit card seems very easy, but is quite complicated. If you do choose to use a credit card, set limits for yourself, don’t max out the spending limit, and make as large of a payment as you can on it each month. Some people use only credit cards, and pay the full amount each month. If this works best for you (because you know you are very strict with your money choices), then by all means, take advantage of what credit cards have to offer. If you aren’t sure your money personality is one that will be able to make credit cards work for you, then maybe you need to follow a stricter NO CREDIT CARD system. I often compare our money choices to our diets, and I personally feel that moderation is the key for some people. Others, I think definitely should not have one.

You won’t have to calculate your own interest rate, but I thought it would be informative to show you where your money is going. And although you don’t need the formula, you should know what your interest rates are and how and when they change. Some interest rates will go up after a single late payment, so make sure to read that fine print.

Join me for the next blog which will continue our discussion of debts by delving into the pros and cons of different types of loans. Follow Being Grown Up on Facebook, Instagram, and Pinterest and look for me on Anchor.fm/kim-stamler. Follow me on here with your very own WordPress account and leave me a comment. Take care! XOXO