David Lerner Associates: Credit Card Pitfalls
Every year in October, bankers visit local classrooms on National Get Smart about Credit Day. The idea is to educate kids about the "credit facts of life." Use these facts to teach your kids about the pros and cons of credit at home.
What exactly is credit?
It’s money that a bank or business will allow a person to use now to purchase something, and pay that amount back in the future.
Why does a bank or business offer credit?
It helps customers – they can buy what they want right now, and pay for it over time. But as the bank or the business has to cover the risk of loaning the money, they will charge an interest rate on the amount used. In the end, you pay back more than you used, and the card issuer makes a profit on the loan.
Five Credit Card Pitfalls to Avoid
Read the fine print: It’s so easy to get in over your head with a credit card. Make sure you know exactly what you’re signing up for. Find out how much the interest is, what happens if you pay late, and any other penalties or charges that could be added to your account.
Make only the minimum payment: It might seem like a great idea to be able to spend $1000 now and only pay less than $100 each month on the card. However, the minimum payment only covers your interest and a tiny amount of the loan. When you do this you end up paying a lot of interest, and it can take many years to pay off the actual loan amount.
Late payments: Credit card issuers are very strict about receiving payment each month by the due date on your statement. Each time you miss the due date, you’ll get charged a late fee. That’s like throwing money down the drain. Not only that, it could also damage your credit score.
Max out your cards: Using all the credit available on all your cards can have serious consequences. When the amount you‘ve used is more than 30 percent of the available credit on a card, it lowers your credit score. Card issuers or other loan institutions regard you as more of a risk. You’ll likely be charged higher interest rates, or they’ll reduce your credit limits to curtail your spending.
Balance Transfers: This is not always the best solution. There are often high fees attached to a balance transfer, and if you do the math you might find that leaving the balance where it is will cost you less than that attractive-sounding zero percent interest transfer.
IMPORTANT DISCLOSURES
Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable– we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
David Lerner Associates does not provide tax or legal advice. The information presented here is not specific to any individual's personal circumstances.
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