Using Credit Wisely
The Wise Use of Credit
Many consumers turn to credit when faced with unexpected home or auto repairs, as well as medical emergencies. And credit offers convenience, enabling you to rent a car or hotel room or buy airline tickets over the phone. In many situations, credit offers peace of mind; there is no need to carry large amounts of cash when shopping or traveling.
Despite all the advantages and conveniences credit can provide, there are some pitfalls associated with credit use. Credit can be expensive. Interest rates (often ranging from 14% to 22%), finance charges, annual fees, and penalties can dramatically increase the cost of any purchase made on credit. Then, there is a tendency to overspend on credit. It is much easier to spend more than you can afford when all you have to do is pull out the plastic. Overextension gets thousands of consumers into financial trouble every year.
It is possible to have the best of both worlds, though. Designing a realistic spending and savings plan so you are aware of how much credit you can afford, as well as comparing the cost of credit and shopping around for the best deals, will help you avoid credit trouble.
Here are a few more tips:
Keep your charge receipts in an envelope with a running total on the outside. If the total exceeds an amount you consider appropriate, you know its time to curtail your spending.
Save monthly for expenses such as auto maintenance, holiday gifts, and the kids school clothes. That way you dont need to use credit to cover these expenses, or, if you do charge them, you can pay the balance in full when the bill arrives.
Monitor interest rates. Choose lower-rate financing options whenever possible.
Limit the number of open credit card accounts you have. You dont need more than one or two bankcards, and its much easier to keep track of your total outstanding debt with just a couple of accounts.
How Much Debt is OK?
Shopping For Credit
If you will pay your credit card bill off every month, a low annual fee is important. If you usually carry a balance, look for the lowest interest rate. Shop for a grace period, the amount of time after your purchase during which finance charges are not assessed. Some banks and finance companies give you up to 30 free days, while other card issuers start assessing finance charges immediately upon purchase. In fact, interest starts accruing immediately on cash advances – there is no grace period and the interest rate is higher than that applied to regular purchases.
Depending on your payment and credit use habits, you may also be affected by late and overlimit fees. (Changes in legislation have allowed credit card issuers to increase the miscellaneous fees they charge customers, so it is very important to read all the terms of the credit agreement).
If you have no credit or a bad credit history, you may be able to obtain a secured credit card. A secured card works just like a regular VISA or MasterCard except that you must leave a deposit – usually between $250 and $500 – with the issuing bank as collateral. If you default on your payments, the bank takes the money owed out of your deposit.
The interest rate and annual fee on a secured card are often a bit higher than on a regular card. But a secured card can offer you the convenience of a regular credit card and the opportunity to improve your credit record. When comparing cards, try to find one that does not charge an application fee and confirm with the issuing bank that they will report your payment performance to at least one of the three major credit reporting bureaus – Experian, Trans Union, and Equifax. Make the most of this chance to build an unblemished credit report!
Each of the following organizations publishes a list of low-rate and/or low-fee credit cards available to consumers:
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