The things you ignore are the ones most likely to bite you. Would you purposely borrow several hundred thousand dollars to buy a home or tens of thousands to buy a car and then ignore the payments? Of course not, yet people have routinely borrowed large sums of money and then acted surprised when the payments came due. Some just ignored them! How? With credit cards. Credit cards are simply a mechanism for borrowing money and about 70 percent of cardholders carry a balance, the average being about $10,000. One key to managing your credit card usage is understanding the terms of your credit card issuer loan. As with any loan, you must know:
- The interest rate. If you have a card now, do you know your rate?
- The amount of your monthly payment.
- When payments are due.
- How to make a payment.
- What happens if you make your payment after the due date.
- What happens if you request an amount in excess of your credit line.
- How long it will take you to pay off your loan.
- Why you needed the loan in the first place.
Credit cards are dangerous juju. They, like many things in our lives, can cause problems when not used carefully yet they are an incredible convenience. Most provide protections against defective merchandise, provide for dispute resolution if a retailer doesn’t live up to his end of a bargain, and some even provide insurance for your purchases. Many provide perks and rewards that can be redeemed for gifts and travel. At the same time, the credit card agreement is very one sided. Slip up, even just a tiny bit, and you’re toast (financially speaking). The issuer can ding your credit score by placing derogatory information on your credit report, jack up your interest rate, and pop you with a host of fees – and you agreed to all this! Even if you don’t slip up, the credit agreement gives the company astounding flexibility to adjust your rates any time it feels the need (after the “introductory period”). The biggest problem though is the anesthetizing effect that little piece of plastic has on your sensibilities. They allow the holder to suspend judgment and ignore the question “Can I really afford this right now?” Not only that, but many studies show that people who use credit cards forget the amount they spent, before they reach the parking lot while those using cash or checks knew the exact amount to the penny. Other studies show that people spend between 18 percent and 36 percent more when they use a credit card than when they use checks or cash. Credit cards are like Novocaine for your brain! But always remember: You’re the one in control. Credit card issuers don’t want to lose your business (Citibank freaked when my wife told them we didn’t need them anymore). After all, they only make money when people borrow and they’re in the business of making money! How do they make money? By charging you interest and fees and by paying the retailer less than what you charged. Yes, you heard that right. Credit card companies don’t reimburse the full amount to the retailer, but take a 1.5 percent to 5 percent cut off the top. It’s a convenience for the retailer because the money is deposited to her account that night and she’s willing to pay it. Never forget that the amount you charge is a loan. The credit card company wants to take money out of your pocket and put it in theirs and with a few exceptions, they are doing so legally. Just because they give you a shovel doesn’t mean you have to dig though! Ultimately, the choice is yours, so take personal responsibility and treat your credit card as an automatic loan machine.