Credit cards are a permanent part of our lives now. They provide a safe, easy way to pay debts. A credit card also means that you might be spending more than you think.
I always recommend that consumers use their credit cards when purchasing over the internet or even from local sources if you have a more expensive purchase. If your account number is stolen during one of these transactions, you have additional protections with that card. If the account shows an erroneous charge, you simply call the credit card company and tell them it isn’t yours. It will be removed immediately.
Also, many credit cards come with a guarantee against merchandise breakage or loss. Check the rules on your individual credit card to see what guarantees it offers.
You do pay for the safety and convenience that credit cards bring you — in the form of the interest accrued. The average credit card today clocks in at 15.36 percent. That means for every $100 you spend, you have to pay back $115.36 if you keep that charge on the card an entire year. That is expensive enough, however, there are times when you will pay even more than the standard interest rate. Let’s take a look at three ways you will pay more.
If you don’t pay off accounts each month: Interest is calculated based on the balance on your account. If you pay less than the total amount, the unpaid balance draws interest. As the interest is accrued and added to the outstanding amount, it increases the amount you are paying interest on. The biggest danger is when you pay only the minimum payment. Check the minimum payment warning on your credit card bill. This information is included on your statement and will tell you how long it takes to pay off the entire balance when paying only the minimum payment.
Let’s look at an example. If you owe $1,400 on your credit card at 14.5 percent and you pay the minimum payment of $28 each month, it will take 12 years to pay the balance. That is assuming that you don’t charge anything new on this account. Increasing the payment to $49 a month would allow you to pay it off in three years. You’ll also pay one-fourth as much interest ($341 compared to $1,248).
If you get a cash advance: You can get cash from your credit card if you find yourself in need. However, be prepared to pay a premium for that privilege. Where you pay 16.5 percent for goods purchased on the card, a cash advance may cost you 5 to 10 percent more. In addition, you may be charged a fee for the cash of $5 or 5 percent of the total, whichever is the higher amount. When you add both a fee and the higher interest, getting cash becomes one of the most expensive transactions you will make on your credit card.
If you use a store card: Keep track of what type of card you are using. Store cards clock in at a higher interest rate, many times as much as 10 percent more. Don’t be lured into opening a store account for the special deals. Lowes, Sears and Home Depot all have credit cards that offer a discount or consideration for using their store brand cards. These special offers will not offset the increased interest you will pay for the higher percentage on the store card.
Credit cards are a safe, easy way to buy what you need. However, it is important to recognize what that convenience costs you.
Roxie Rodgers Dinstel is associate director of the Cooperative Extension Service, a part of the University of Alaska Fairbanks, working in cooperation with the U.S. Department of Agriculture. Questions or column requests can be e-mailed to her at firstname.lastname@example.org or by calling (907)474-7201