Credit cards when used sensibly can be very helpful. There are safer than carrying a big wad of cash and most will protect you from identity theft or if your card is stolen. They do this by limiting your liability to $50 – and in some cases will even waive that. Of course, you’re expected to report suspicious transactions as quickly as you can.
How a credit card can help
A credit card can be very helpful in building a credit history. Again, this assumes that you use it sensibly. But when you put a few charges on a credit card and then pay off your balance at the end of the month this will help you create a good credit history that tells potential lenders you could be trusted. This will also save you money, as you should be able to get a mortgage or personal loan at a lower interest rate.
If you choose the right credit card you could earn some great rewards. The credit card business is very competitive these days so why not take advantage of it? Depending on the card you choose you could earn cash back, points or airline travel miles.
Last but certainly not least using a credit card for your everyday purchases can help you track your spending and see those areas where you could make cuts and save money you could tuck away into savings or invest.
What you really don’t want to do
Using a credit card to make everyday purchases can be a really good thing – if you pay off your balance at the end of the month. However, if you make just the minimum payment and carry a balance forward into the next month you may quickly slide into trouble. This is due to a little thing called compounding interest. What this means is any interest charges are added to your principal (which is the amount you originally charged) so that your debt grows exponentially.
For example, if you have a balance of $100 on a credit card and it accrues 10% in interest every month, you will be charged $10 the first month. Then with compounding, that $10 will be added to your original debt so now you owe $110. The next or second month you will again be charged that 10% interest but this will be $11 meaning that you now owe $121. And on and on. When you understand this you will understand why some people end up paying more than $1200 in interest on a $5000 credit card debt.
What you really, really don’t want to do
While you don’t want to fall into clutches of compound interest there is something else you really, really don’t want to do and that’s to take cash advances. The credit card companies generally have very high fees and interest rates on cash advances. Plus they usually start charging interest immediately. This makes it unlike purchases you make with your credit card, which gives you an interest-free grace period that could be as many as 30 days based on your billing cycle. In fact, if you were to make a purchase the day after your billing cycle you might actually have closer to 60 days interest-free.
If you take a cash advance on a credit card with a 12% interest rate, don’t think for one minute that you’ll be charged 12% on it. What’s more likely is that your interest rate will be a sky-high 24% or twice as much as the interest rate on your purchases. In addition, cash advances often have a fee, which is usually either 5% of the advance or $10 whichever is higher. What this translates into is that if you were to get a $1000 cash advance it would cost you an additional $69 even if you repaid it in full within 30 days.
Cash advances you won’t see coming
It’s also possible that you could have a transaction that’s treated as a cash advance without you knowing it. This is because there are transactions that are treated as cash advances if you pay them with a credit card. Included in this group are money orders, wire transfers, legal gambling purchases and bail bonds.
Sometimes it’s the best option
While a cash advance can be extremely costly it can be okay to get one if it comes down to a choice between a cash advance and getting a payday loan. This is because there are online payday lenders that charge an annual percentage rate of, wait, take a deep breath, of as much as 652%. If you have an emergency and need just a couple of hundred dollars to hold you over for a few days until your next payday then a cash advance might be the best of several different bad alternatives.
The worst cards
There are several credit cards that charge even higher interest rates than the 24% quoted above. For example, First Premier Bank’s interest rate is 36% for a cash advance on its card. Next in line was the BP Visa and the Texaco Visa, which both charge 29.99%. And you might not want to take a cash advance on ExxonMobil’s SmartCard as it has an interest rate of 29.95% making it the fourth highest APR for cash advances.
If you’re having a problem with your credit card debt
Did you know that the average American now carries more than $6000 in credit card debt? If you have fallen into the trap of compounding interest and find that you owe this much or even more there are several ways to handle the problem. For example, you might get a debt consolidation loan with a lower interest rate than what you’re currently paying. Or you could get a debt management plan from a consumer credit counseling agency. Debt settlement might even be an option. However, what many Americans are now doing is driving for Lyft or Uber to earn extra money to pay off their debts. Driving for one of these companies can generate $500 or more a week and it’s something you can do whenever you like. There are no set hours and no one watching over your shoulder to make sure you do a job. All that’s required is to register with one of these two companies and have a car and a smart phone. Then just start driving people around and earning money. It’s really that simple and could even be fun!