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The very wisest consumers, try never to commit
themselves to financial obligations that they just don't have the
funds to cover, with the exception of long term payback items such
as a car or home, for which they budget. These same wise people
however, will likely carry one major credit card, not only for
emergencies, but to make periodic purchases, which they pay off
within the "grace" period before interest is accrued. A
no annual fee card, paid off regularly, is a plus on their credit
record. There is also the additional security of knowing you have
an option in case of an emergency expense, or when you need more
funds far from home.
Many people start out using their credit card with good common
sense, but then fall victim to the seductive availability of that
little something you want (but don't necessarily need), when cash
is a bit short.
If you always paid off your balance before interest accumulated,
the card's rate wouldn't really matter a lot. But look at some of
the average rates for everyday purchases. They can run as high as
21-26%.
Let's say you really do need an orthopedic mattress, on sale at
$800, down from $900. Perhaps you have a certificate maturing in
six months, and you know you can pay it off then. At 21% a year,
with no principal payments during the six months, you've paid $84
in interest. It's not much of a saving, but if you DO pay it off
in six months, you have gotten something you needed, saved a small
amount, and have a positive credit record.
Things begin to fall apart when you can't keep that credit card in
your wallet. Maybe you've paid the credit card down to $500, and
now there's new vacuum you'd really like to have. Pretty soon it's
something else. Then the total on your card starts creeping up,
along with the interest paid every month. When you open your
monthly statement, it's hard to believe you spent that much.
When things are getting out of hand, you need to look at your
spending habits. Do you really have the extra cash that credit
cards are costing you? If so, start making it work for you,
instead of throwing it away on interest payments. If your credit
cards are at their limits, and your interest rate is high,
consider a personal bank loan to pay them off. These are often
lower interest, and the combined debt in one payment, will not be
as intimidating.
That doesn't mean going out and spending the extra you would have
been putting on your cards. Put a little away for unexpected
bills, instead of having to pull out the credit card. In fact, put
that away in a compartment of your wallet and tape it shut. That
will remind you that it's for only the worst of emergencies. If
you have a little left over, put it down on the principal of your
loan. Paying that down faster than required, is also a positive
entry on your credit history.
Using your credit cards wisely, and monitoring your credit
history, demonstrates that you are fiscally responsible, and puts
you in a favourable light, when you do need to apply to a lending
institution for a loan or line of credit.
Keeping an eye on your credit status is easy. You can sign up for
a free report from the three major CRAs at Free
Credit Report.
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