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(originally published November 2009)
Spend now, pay later. It’s an appealing aspect of credit cards and a seemingly simple concept. However, the average outstanding credit card debt for households that have a credit card was $10,679 at the end of 2008. One year earlier, that average was $10,637 according to an April 2009 report by Nielson Research. Credit cards aren’t necessarily a bad thing, but how you use them will have a lasting impact on your finances.
Credit Card Basics
Every credit card has a limit, which is the total amount of money you can charge. Your balance is the amount of money you spent using the card, plus applicable finance charges or other fees. If your balance exceeds your limit, you may have to pay a fee, your annual percentage rate (APR) may go up or you may be cut off from making additional purchases.
The APR is the interest rate the card issuer charges on the unpaid balance. When you receive your monthly bill, you have the option to pay a minimum amount or to pay your balance in full. If you only make the minimum payment, you’ll end up spending more in the long run. For example, if your balance is $2,000 with an 18 percent APR and you only pay the minimum each month, you’ll end up paying $1,654 in interest charges on top of what you spent by the time you pay off your balance.
Credit Cards and Your Credit Score
It’s important to be smart with your credit card use because it impacts your credit score. Credit scores typically range from 300 to 850 and are used by lenders to assess the likelihood that you will repay your debt. The higher your score, the more “creditworthy” you are deemed. Your credit score will impact whether or not you can secure loans for purchases such as a home or car and the interest rate for those loans.
Credit scores are calculated by looking at several factors, including whether or not you pay your bills on time, how much credit is available versus how much you actually use, the number of credit card applications you fill out and how long you have had your credit cards. You can boost your credit score by paying your bills on time, every time, and by not maxing out your credit cards to the limit. Also, try to limit the number of credit cards you apply for and maintain at least one credit card that is more than two years old.
To obtain a free copy of your credit report, visit http://www.annualcreditreport.com/. Read your report carefully, especially before applying for a loan, to make sure your credit score accurately reflects your finances. Any mistakes or inconsistencies should be reported to the credit bureau.
No More Free Pizza
As of February 2010, credit card issuers will no longer be able to give out free gifts such as pizza or other items in exchange for completed credit card applications. This legislation was designed with college students in mind, who are often targeted by credit card companies. College students looking for a free meal often don’t realize that each credit card application they fill out affects their credit score. They also might be pushed into signing up for a credit card without fully understanding the responsibility that comes with it.
If you’re having trouble managing your credit card debt, contact your local Consumer Credit Counseling Service, a nonprofit agency that will provide free to low-cost education and counseling. Visit http://www.nfcc.org/ to find a location near you.
For more information on credit card smarts and for other money management tips and tools, visit http://www.indianainvestmentwatch.com/.