Being Careful with Credit

Using credit makes spending money easy — and it’s easy to get in over your head by spending more on credit than you can easily repay, especially once finance charges apply. If you carry a balance on your credit cards — that is, you don’t pay off everything you owe every month — what you pay in finance charges can quickly add up. Paying only the minimum payment due each month can further compound the issue.

Let’s look at an example. Say your card has an annual percentage rate of 18%. That equals 1.5% interest on your balance each month. If you owe $1,000, that translates to $15 on top of your bill. That doesn’t seem like much, but if you only pay the minimum required — say, $30 — it will take you years to pay off that balance. And if you continue to spend more, you’re compounding your debt.

On the other hand, when used wisely, credit is a powerful financial tool that gives you flexibility that you wouldn’t have otherwise. Using credit helps you build a credit history, which is essential to buying a home and other major financial moves later on.

When you use credit, you should use the same deliberate and thoughtful planning approach that you use for budgeting your cash expenses. You should know how long you plan to take to pay back the amount you charged, how those payments will fit into the rest of your budget, and how much more it will cost you than if you waited until you could pay with cash.