Article: Using Credit Wisely
If used carefully, credit can be a
helpful financial tool. For example,
using credit to purchase a home now,
rather than trying to save up the whole
purchase price, makes financial sense.
The home provides a place to live that
will perhaps increase in value and the
mortgage interest offers a tax
deduction. Credit may also help you
deal promptly with costly emergencies.
Many consumers turn to credit when faced with unexpected home or auto
repairs, as well as medical emergencies. And credit offers convenience,
enabling you to rent a car or hotel room or buy airline tickets online. In many
situations, credit offers peace of mind; there is no need to carry large amounts
of cash when shopping or traveling.
Despite all the advantages and conveniences credit can provide, there are some
pitfalls associated with credit use. Credit can be expensive. Interest rates (often
ranging from 14% to 22%), finance charges, annual fees, and penalties can
dramatically increase the cost of any purchase made on credit. Then, there is a
tendency to overspend on credit. It is much easier to spend more than you can
afford when all you have to do is pull out the plastic. Overextension gets
thousands of consumers into financial trouble every year.
It is possible to have the best of both worlds, though. Designing a realistic
spending and savings plan so you are aware of how much credit you can afford,
as well as comparing the cost of credit and shopping around for the best deals,
will help you avoid credit trouble.
Here are a few more tips:
- Keep your charge receipts in an envelope with a running total on the
outside. If the total exceeds an amount you consider appropriate, you know
it’s time to curtail your spending.
- Save monthly for expenses such as auto maintenance, holiday gifts and the
kids’ school clothes. That way you don’t need to use credit to cover these
expenses, or, if you do charge them, you can pay the balance in full when
the bill arrives.
- Monitor interest rates. Choose lower-rate financing options whenever possible.
- Limit the number of open credit card accounts you have. You don’t need
more than one or two cards, and it’s much easier to keep track of your total
outstanding debt with just a couple of accounts.
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