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Home Financial Survival Guide

Onine CPA  - Managing Your Credit Cards

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Don't Save - Pay Off Your Credit Cards

In the old wisdom, everyone was supposed to set aside a set amount of money for unforeseen emergencies. However, in today’s world of fast and easy credit, the first and foremost thing you need to do is pay off your credit cards! Credit card interest will eat you alive! Sure you can get an introductory interest rate of 5% however, in 6 months or less you will pay between 12-25% interest. So that means for every dollar you borrow, you pay at least 12 cents of interest. You might think that’s not such a bad price to pay until you consider compound interest.

Compound Interest - Not a Good Thing

Compound interest is a good thing when you are saving money but it’s a bad thing when you borrow money. Let’s see how compound interest works against you. Say you buy something you’ve always wanted for $1,000 on your credit card with a 12% interest rate. Along comes your credit card with a minimum payment of say $30. Well that’s not so bad, anyone can handle a $30 payment, right? So let’s see what your credit card statement would say.

1st Statement:

Purchases       $1000

Finance Charges    10

New Balance     $1010

Minimum Payment    30 

OK you think. My finance charge was $10 dollars (1/12 of 12% x $1000) that’s not so bad . Is it? Let’s see what happens next month.

2nd Statement:

Previous Balance $1010

Payments            30 

New Purchases        0

Finance Charges     10

New Balance        990

Minimum Payment     30

So after making your first payment of $30 you actually have paid off only $10 of your debt by the end of the next month because of compound interest. Pretty dismal isn't it?

How long do you think it would take to pay off your the rest of the debt making minimum monthly payments?

As you can see, borrowing money is not the best way to buy anything. Yes we all have to borrow to buy a house (which is the only tax deductible interest allowed to consumers) and a car, but using credit cards for casual everyday purchases will keep you indebted for the rest of your life. Live within your means and control your spending.

Credit Card Conclusions

1. Use credit card debt only as a last resort.

2. Try to pay off your purchases as quickly as possible. Making minimum payments will get you nowhere and will result in the most interest.

3. Don't save or invest money when you have large credit card debts. Pay off the credit cards first.

4. Tear up your credit cards if you have trouble with controlling your purchases.

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