Wednesday, May 13, 2009

Pay Down Your Credit Cards

Money Saving Tip #138 - Pay Down Your Credit Cards. If you do not pay off your credit cards each month you should be. And if you can’t, you should at least pay more than the minimum to get rid of your credit card debt as fast as possible. Getting caught up in credit card debt is a very dangerous road to go down. If you have credit card debt, you likely know that the rates you are borrowing money at are incredibly high – in many cases near or above 20 percent. If a credit card has a 20 percent rate then that means for every $1,000 borrowed, you are paying $1,200 back to the credit card company. In other words, you are paying $200 to them for the privilege of borrowing $1,000 for a year.

If you see a television you like that costs $1,000 and you borrow that money on your credit card for one year, then you are actually paying about $1,200 for that television. That’s not too good, considering some people will spend lots of time looking around for a deal that will save them 10 percent off that television, only to turn around and pay more than that back on their credit card if they are not paying it back full within a month.

But even worse than that is only paying the minimum that the credit card asks of you each month. It would take approximately $100 per month to pay the amount you owe within a year, but suppose the minimum on your credit card bill is only $20, and that’s all you pay? Now you have stretched that payment out over 5 years, and guess what? You are paying 20 percent interest on your balance for each of those 5 years. In essence you are paying at least twice the original cost of the television.

The bottom line is, interest rates on credit cards are extremely high. Borrowing money at high rates means you are paying a lot more for your item than if you paid for it outright at the beginning. If you can’t pay your credit cards back in a timely matter, then don’t use them to begin with. And if you already have credit card debt, then try to pay it off as quickly as possible by putting as much toward it each month that you can. The sooner you get your credit cards paid off, the quicker you can start putting savings away for things that are more important than televisions.

In Real Life (IRL) – I am not against credit cards like some people are. But I do understand why some people are anti-credit card since they may be trying to dig their way out of credit card debt. I was taught at a young age that if I cannot afford something that I shouldn’t buy it. So I never got caught up in the credit card mess that other people did. Having said that, I can see that it would be easy to get caught up in it. After all, it doesn’t feel like you are actually spending money. It’s much easier to pay later than pull out the money now.

And while I don’t deny that I may spend more in a supermarket or retail store because I use a credit card, I still think they serve a valuable purpose to use other places. There are many things I put on my credit card that I would not pay cash for – like renting a car, hotel accommodations, traveling abroad, or simply paying a doctor’s bill. Each of these gives me 30 days in which to keep the money and earn interest in my bank before I have to pay the credit card company. Not a bad deal if you pay them off each month. And while I don’t collect airline miles (since I hate to fly!), I do earn 1 percent back on all of my purchases, which is just a bonus. And I really do feel comfortable having a credit card on hand. If I ever see a must-have purchase for a good price or a get into a bind with my car I feel better knowing I have it. Yes, a debit card does a lot of what a credit card does, but it may not cover an $800 emergency repair bill if there is only $500 in my account and I don’t get paid until next week. And did you know platinum credit cards bring have some type of insurance if you use it to pay for a commercial flight and it crashes? (Me neither, but my husband claims id does.)

Anyway, there is a way to use credit cards wisely. They are not a ticket to free-for-all spending, but buying pre-thought out purchases, using it for travel, for sudden car expenses (until you can get your money out of the emergency fund), and earning interest for a month are valid reasons to use them. Just pay them off each month and you should be fine.

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