Credit cards can be an exceptional purchasing tool that carry
many benefits and have a big upside. However, the resulting interest
payments -- if an account isn't paid in full on a monthly basis -- can
add a lot of extra money to a purchase price.
Bryan Clarkin, the Fort McCoy Army Community Service (ACS)
Financial Readiness Program manager, said the optimal way to use
credit cards is to use them to buy only those things that you can
afford and plan to pay the bill in full on a month-by-month basis or
to use cash.
Fewer than one-quarter of Americans do not have a credit card,
according to one study. Another 30-plus percent reported they have
paid their last credit card bill in full.
So, in total about 55 percent of Americans have no credit card
According to studies, personnel who have credit card debt owe
an average of about $9,000. Personnel who cannot afford to pay off
their credit cards in full on a monthly basis need to develop and use
a repayment plan that fits their budgets, Clarkin said.
Paying the minimum amount due, which currently is about 4
percent of the total owed on a monthly basis, is not a good plan,
Clarkin said. At this rate, the interest that accrues on the unpaid
amount will keep increasing the amount owed and it may take several
years or more to pay off an account.
In many ways, this is similar to what happens when personnel
take out payday loans, he said. The interest rate makes it difficult
to repay the loan in small amounts because the interest keeps
accumulating. Clarkin said military and civilian personnel should
avoid these types of loans or making repayments in this manner.
Clarkin said recent changes by credit card companies to raise
the minimum monthly payments from 2 percent to about 4 percent isn't a
panacea for consumer debt, but most financial experts think the change
will help. If consumers pay more per month on their credit card bills,
they'll get out of debt quicker and pay less interest.
The Web site http://www.BankRate.com, which has a lot of good
information about interest rates and credit card interest rates, uses
the example of a $2,500 Hawaiian cruise, which many people may wish
they could take to beat the wintertime blues, Clarkin said.
If consumers charge the $2,500 for their Hawaiian cruise to a
credit card with an 18 percent annual interest rate, and make minimum
payments of about $38 a month (based on the 4 percent minimum), it
will take them 34 years to pay off the cost of the trip. This would
result in paying about $6,281 in interest, for a total of $8,781 for
If consumers can increase the amount they pay per month (by
$12) to $50 on the $2,500 bill, it would take them eight years to pay
off, with approximately $2,198 paid as interest for a total cost of
$4,689 for the same cruise. This would cut the actual cost of
the cruise almost in half compared to just paying the minimum, he
"It's a huge savings in time as well as interest,"
Clarkin said the best way to avoid the pitfalls of using credit
cards is to set credit-card spending at a predetermined limit that can
be repaid on a monthly basis or short-term basis or not to use credit
cards at all.
The best thing about paying with cash is there is no interest
or fees charged, he said. People can avoid fees associated with
getting cash from automated teller machines by writing checks or using
debit cards to make purchases.
The added convenience of these is the financial transactions
can be tracked in hardcopy or through online banking services.
Using debit cards, however, can carry risks if the card or
account is accessed by unauthorized personnel. Many financial
institutions do not have financial safeguards for debit cards that
limit losses, such as those available for credit cards, he said.
Most credit cards have limits for unauthorized use or loss of
cards, such as $50 if the loss is reported in a timely manner. Clarkin
said credit cards also provide a record of transactions with the
monthly bill, as well as a valuable option of allowing personnel to
challenge unauthorized transactions or incorrect billing figures.
Other unforeseen consequences of using credit cards are the
impact the transactions may have on credit reports maintained by the
three credit bureaus, Equifax, Experian and TransUnion, Clarkin said.
High debt, excessive debt churning, and too many credit cards
all can have a detrimental effect on a credit score, undermining
customers' ability to obtain favorable credit (interest, repayment)
terms for insurance, home loans, or vehicle purchases, and may be used
to determine eligibility for employment opportunities. To opt-out of
all pre-approved credit offers, consumers can call (888)-5-OPTOUT
The ACS Financial Readiness Program has more information about
the proper or expedient use of credit cards, debit cards, checking
accounts, cash, etc. Clarkin said personnel can visit ACS at 2111
South 8th Ave., or call (608) 388-6812 or (608) 388-3505.