Credit Information

Credit can be an asset or a liability, depending on how it is used. Generally speaking, it is advantageous to use credit to offset expenses that become more valuable over time or can allow you make more money (like a college education or a house). Using credit for items that depreciate (like clothes or vehicles), on the other hand, can be very detrimental. This is because the interest that comes along with borrowing money means that the actual cost of the item increases.  In many cases, using credit can drastically increase the amount you pay for an item. This becomes even more true when you only make the required minimum payment.

For example, let's say you go on a shopping spree and get some clothes, a new TV, and a few other items, putting a total of $1,000 on a credit card. If you only make the minimum payment on this debt, and don't add anything to it (assuming a minimum payment of $10 or 3% of the debt (whichever is greater) and an interest rate of 18.9%), your $1,000 shopping spree will cost you about $1,880 by the time you pay this card off, which will be over 10 years later, assuming you don't charge anything else. 

The amount you will pay doubles because of "compound interest," which allows credit card companies to add any unpaid monthly interest to the principal, so you don't pay 18.9% of 1,000; instead, the principal (the original $1,000) gets larger if your payment is less than the monthly interest. 

The interest accrued in this example is bad enough, but imagine having several thousand dollars on credit cards, plus a car payment.  Many people get behind on their bills, causing their interest rates to rise, making it even harder to get out of debt.  If you do find yourself unable to make a payment, contact the company right away.  Many times they will postpone your payment date, waive a late fee, or work with you in some other way since you are making an effort to stay current on your payments. 

Instead of using credit for that $1,000 shopping spree, why not plan for it and make payments to yourself ahead of time?  Even if you were to save that 3% of the $1,000 ($30 per month) you would have $360 in one year.  Add another $50 per month, and you would have that $1,000 in one year and your shopping spree would only cost $1,000 instead of $1,879.93. 

Of course, you can flip this equation the other direction and put your money in places where it gains interest and grows, but it is difficult to do this if you have to make large payments toward debt. 

In any scenario, you will be much more likely to have money left over at the end of the month if you set up and follow a budget.