Credit Cards

Plastic is the easiest way to deal with gaps in paychecks when buying major items, but they are also the easiest way to destroy your financial picture early. Continually holding credit card debt across several months allows interest to build on these balances anywhere from 12% to more than 20%. The longer you keep a balance, the more damaging the interest expense becomes, and the harder it becomes to pay the balance down. If you forget payments you will suffer nasty penalties plus potentially a higher rate on unpaid balances.

If you maintain a balance on your credit card then you are assessed an interest expense on that balance each month. This adds up to an annual loss to you of whatever your interest rate is times your outstanding balance – and since in prior sections we mentioned you should expect a long-term average cumulative growth rate of about 10% with equities then you can get an even better gain by paying off your credit card debt! Pay down your debt quickly, but wisely. Keep contributing to your work’s 401(k) plan as you make smart budgeting decisions to leave yourself enough savings to pay down debt.

Don’t be shy from cards, though, as they are a great source to give you a borrowing history, which will lower your costs to borrow by increasing your credit score for future events like a home purchase (i.e. you will get a lower interest rate if you have a long and strong history of taking on debt each month and paying it off in a timely manner). Use at least two cards on a regular basis but don’t spread yourself too thin with cards from every retailer you visit once a year. Too many credit cards outstanding gives you the chance to forget payments and also increases your risk level as seen by lenders since you have the ability to take on a lot of debt quickly.