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Plugging Up The Money Drain, Part II - Credit

Jan 21, 2008
This article is second in the series of plugging the money drain article series. There are two more articles coming after this.

Could examining the way you use credit free money up in your budget? Absolutely yes.

The first thing you need to realize is when you use a credit card you no longer know the price of the item you are purchasing. If, for example, you buy a $30 pair of jeans and consider it a bargain because that was 20% off list price and you use a credit card that charges 18.9%, (the average credit interest rate), you are perhaps thinking that you intend to pay your balance off as soon as the bill arrives. But the reality is, most people carry a large balance on their credit cards. The average household in America now carries close to a whopping $10,000 in credit card debt. At 18.9%, the average household is paying close to $2000 in credit card interest per year, and those particular jeans are now $35.67 in the first year, almost back to full price. If you make only the minimum payment each month on your jeans, their cost by the time they are paid off will be about $52.50. But even if all you have on your credit card is that one pair of jeans, if you miss a payment, you probably just doubled the price of the jeans because of the late fee. More than half of credit card owners incur late fees. And as if that weren't enough, incurring a late fee usually increases your interest rate on your card as well.

The best way to save money with credit cards is to avoid using them in the first place and instead use cash as much as possible. If you do use a card, pay off your balance the first month, and definitely avoid those late fees.

Whenever you borrow money, whether by card, mortgage, auto loan, home equity loan or other loan, in addition to looking for a low interest rate, try to borrow for the least amount of time, and pay more than the minimum payment. Borrowing is going to cost you the longer you take to repay. In home loans, for example, you may pay close to three times the original price of your home in mortgage payments. Getting a fifteen or a twenty year loan may make your monthly payments 10 - 20% more, but the total cost of the home will be closer to double the price, saving you tens of thousands of dollars on the same house. If you add a mortgage payment a year and apply it to the principle, you can also save big bucks.

The same is true for auto loans. If you must borrow, a two year contract will cost you much less in the long run than borrowing for longer, so resist the temptation of buying the nicest car your credit will allow. Buying a less expensive car and paying it off more quickly will let you get ahead of the game and a smaller portion of your money will be thrown away on interest rates.
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