[ The Real McCoy Online Home ]                                                                                                                    February 8, 2008

Consumers can benefit by using credit cards wisely, paying bills on time

      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 debt.

      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 their cruise.

      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 said.

      "It's a huge savings in time as well as interest," Clarkin said.

      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 (1-888-567-8688).

      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.


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