Credit cards are one of life's greatest conveniences, and an essential part of modern living. It make it much easier to travel to foreign countries - you can just charge everything to your credit card and not have to worry about carrying foreign currencies and travellers checks. Sometimes they're just necessary, for example you'd find it near impossible to buy things online without a credit card.

Credit cards also give you points for spending with them, which you can exchange for gifts. In a sense, paying with a credit card is a little bit like getting an upfront discount. But the discount is very small indeed, anywhere from 0.5% (with Visa/Mastercard) to 1.5% for American Express cards. And that's before considering the annual fees you may be paying to keep your card. Depending on your bank and your spending pattern, your savings from the upfront discount might be less that what you're paying in annual fees.

Credit cards if used wisely, can be a useful tool. Unfortunately if they are used wrongly, credit cards can become a black hole that sucks you in financially and destroys your life.

The first way that people misuse credit cards is to allow the ease of paying with a credit card to lull them into a false sense of affordability. Its easy to swipe your card and buy stuff, and forget that it's real money being spent. Credit card companies have done an excellent job of marketing credit cards as a lifestyle choice, and making it seem that you can afford anything that they let you charge to your card. It is all too easy to fall into this trap if you don't plan and stick to a budget when using your credit cards.

The second and most dangerous way people misues credit cards is to roll their credit card debt (i.e. not pay off their credit card debt in full each month). Credit card companies charge interest rates anywhere from 12% to 21% per annum on your credit balance. That means that if you keep rolling a $5,000 balance on your credit card, after a year, you'll have paid up to $1,050 in interest! And that's assuming you pay your credit card bill on time. If you make a late payment, the bank will add a penalty fee to your debt balance.

And here's the most important thing that many people don't realize: if you just pay the minimum sum each month, you will never ever pay off your credit card debt. Why? because the minimum sum you pay each month is just enough to cover the interest you owe the bank. It doesn't reduce the principal debt by one cent. So if you think you're getting a good deal just by paying the minimum sum each month, think again.

For example, it might look like a smart thing to buy $5,000 worth of furniture on your credit card, and just pay the minimum payment, $100 for example, each month. But if you do that, you'll have to keep paying $100 a month for the rest of your life! That's $1,200 over one year, and $12,000 over ten years. And even after 10 years, you still won't have reduced your $5,000 debt by one cent.

Here are 2 general rules of thumb to help you steer clear of the credit card debt trap:

1. Pay off your entire credit card bill every month. You might even consider borrowing money from your parents/spouse/close friends if you don't have enough cash to pay off your card bills in full; credit card debt really is that dangerous.

2. If you have to roll over your credit debt, for example because of a medical emergency, then make sure that you pay off more than the minimum sum each month. For example, make it a policy to pay off at least twice the minimum sum every month.

Use credit cards wisely, and you'll live a much happier life!

Article Copyright © 2008: Wei L. Wang
(Picture by Andrew Dunn, cc-by-sa-2.0)