Credit Cards

CREDIT CARDS HAVE become so integral to American life that some folks almost never pay cash and instead charge even the smallest expenses. That’s convenient, it can be safer than carrying cash and it could come with a monthly bonus, in the form of credit card rewards. Set against that is the well-known downside: If you aren’t careful, you will charge too much, won’t be able to pay off the balance in full and get walloped with finance charges.

There is no legal maximum interest rate that a credit card can charge, though many card issuers appear to charge no more than 29.99%. Minimum payments are typically set so that your balance should shrink over time, assuming you aren’t adding more debt. That might mean the minimum payment is 1% of the balance plus that month’s interest and fees, which all told might come to around 2% or 3% of the card’s balance.

How many people carry a balance? Reliable statistics are surprisingly hard to come by, but it seems a little over half of all Americans carry a credit card balance and the average debt per cardholder is around $5,000.

Carrying a card balance, while sometimes unavoidable, isn’t smart. Today, a credit card might charge an interest rate of 12% to 20%—an exorbitant sum, especially when you consider that today’s savings accounts and short-term certificates of deposit pay 1% or less. Credit card debt is the classic example of bad debt: The interest rate charged is steep, the interest isn’t tax-deductible and the money was typically used to buy nothing of lasting value.

Want to avoid charging so much that you end up with a bill you can’t pay in full? Try deducting your credit card charges from the balance in your check book. That way, when the bill arrives, you won’t be unpleasantly surprised—and you should have the money to pay off the entire sum owed.

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