If you don’t have enough green when you charge, you’ll end up seeing red.
Being smart about credit involves more than just picking the right card. You can be diligent about choosing a card with no annual fee, a long grace period, and the lowest APR on the market, and still run up thousands of dollars of debt.
What can really get you into trouble with credit cards is how much you charge, or more precisely, how much more you charge than you’re able to pay off. Whether or not you stay ahead of the credit game depends on how you handle some all-too-familiar situations.
MONEY DOWN…AND OUT
A lot of credit card spending is done on the spur of the moment, when you haven’t planned on buying something and you don’t have cash on hand.
For example, suppose you’re out for dinner or drinks with a group of friends and the server brings one check? It makes life a lot easier just to pull out your card and collect cash from everyone else—to say nothing of the ego trip it can be. But chances are you’ll put the cash you collect into your pocket rather than your bank account. And it’s equally likely that one or more of the group says they’ll have to owe you their share.
Of course, if you’ve got the will power to set aside the cash you get from your friends until your monthly bill comes due or the persistence to keep a running tally of how much the ones who haven’t paid still owe you—there’s nothing wrong with picking up the bill once in a while. But if it gets to be a habit, or if your friends take advantage, it can turn into a real problem.
IT’S NO BARGAIN
One of the best uses of credit—the ability to buy things at a good price even if you don’t have the cash—can also create a financial nightmare if you do it too often.
For example, what if there’s a huge sale at a store where you’ve had your eye on a new piece of electronic equipment, or a new jacket, or something as essential as a bed? There’s no question that getting 40%—or whatever—off the full price is a good deal.
But if that extra $500 or $900 on top of your typical credit card balance is more than you can repay, you may be digging yourself into a hole. And the more often you add a major purchase, the larger, or deeper, the problem can get.
DANGER IN STORE
Often, when you’re shopping at a retail chain or department store, you’ll be offered a chance to apply for a store credit card, usually with an opportunity to save money on your current purchase or to take advantage of other savings in the future. This can seem like a good deal when you’re standing at the checkout counter, and it can even be a good deal sometimes. But don’t forget what it will mean for you down the line.
First of all, these cards often have even higher APRs than regular cards, sometimes as high as 25%. Some may not have grace periods. And it’s a fact of life that people tend to spend more using a card than they do if they’re spending cash. The lure of the additional 10% or 15% savings the store offers you to open and use your account can tempt you into spending more than you might otherwise.
In addition, taking on multiple cards—and their credit limits—can make you look like a risk to future creditors. You can appear to be overextended even if you stop using the cards after taking advantage of the initial offer. Surprisingly, canceling the cards you’re not using doesn’t necessarily improve your credit standing.
And while it may seem inconsequential, the more bills that arrive during the month, the harder it can be to stay on top of all of them, even if the total amount you charge isn’t huge.
THE BARE MINIMUM LEAVES YOU EXPOSED
What you charge each month becomes all too clear when your monthly statement arrives, and you see how much you owe. There are basically two ways to deal with your statement: You can pay all or at least a substantial portion of your balance. Or you can make the minimum payment, which must be enough to pay all of the interest and some principal each month.
While paying the minimum keeps you out of trouble with creditors, it’s much more costly in the long run, since you’ll always be paying interest on a large amount, which doesn’t decrease very rapidly. For example, if you pay a minimum balance of $20 on a $300 purchase you made with a card that has an 18% APR, you won’t pay off that deb for 18 months, and it’ll end up costing you $343—over 14% more than the purchase price. And that’s if you don’t buy anything else in the meantime. But if you could pay $50 a month, it would take you only seven months to repay and cost $317 in total. Of course, if you paid off the whole $300 when you first got the bill, it wouldn’t cost you anything extra—that’s the best possible credit scenario.
I worked for six months as a personal assistant to a film executive. As part of my job, I had to go shopping for my boss. I charged big-ticket items to my own personal credit card—cases of champagne, expensive clothing, a $500 gift for the executive’s fiancé—and then waited to get reimbursed. My credit limit doubled while I had the job, and when the executive was late in reimbursing me, I had to pay the interest that accumulated on the balance.
—Caddie H., 24