Credit cards can be a great tool – but can also cause you significant financial pain. They must be used with caution, and you need to be careful carrying any credit card debt. It is VERY expensive and can have long lasting negative impacts on your financial future. With that being said, if you find yourself in the post-holiday financial hangover, you may want to consider taking advantage of some of the special interest free deals offered by a credit card company.
If you do, just be smart and disciplined in paying off your balance, and don’t use the credit card deal as a slush fund simply to rack up more bad debt.
the scenario/the pain
You racked up $2,000 in Christmas expenses. Your budget was only $500. So now you have $1,500 in extra credit card debt and don’t have the cash to pay it off. If you leave the balance on your credit card, you are going to start paying interest. And if you continue to make purchases on the card, and can’t pay the balance down, the amount of money you pay to the bank in interest will start to add up pretty quickly when you consider that credit card interest rates can run anywhere from 12 – 15% and higher. If you carry a $1,000 balance over the course of the year at a 15% interest rate, that’s $150 you will pay to the bank on that $1,000. We’re not even talking about how compounding interest works – that’s just straight simple math.
using credit card deals as a tool
One idea – and there are some big caution signs with this – is that you could take advantage of some of the deals on credit card transfers. If you get a no interest deal for a year, or even 18 months, transfer that $1,500 to the card, and then stick to a plan to pay it down each month. If you get the card with no interest for a year on balances you transfer, pay down $125 each month and don’t use the card for anything else. At the end of the promotional period – you will have paid the $1,500 off and you will have saved by not paying the bank all the interest you would have paid had you kept that balance on your original card.
Credit cards can be a great tool – but they also can cause a lot of financial pain when people just charge away on them and don’t pay the balance off each month. If you are using a credit card, use it wisely. Don’t carry balances on them. When you carry a balance, it’s a great deal for the issuer (the bank) because they make a lot money off of you (i.e. a s#$%-ton of money).
When you pay the balance off each month, you can reap the reward of whatever benefits go along with the card, and you can keep your money in your bank account until you pay the bill. By paying the balance off each month, it’s a win-win for you in many ways. Use credit cards wisely… and use them in conjunction with a well-developed budget/financial plan.