IT'S time to come clean about our dirty credit card habits and how we can avoid them eroding our wealth.
While we've all been slowly reducing our <a href="http://sett.com/sherricide21/corliss-online-group-financial-magazine-on-how-to-get-out-of-credit-card-debt-faster2">outstanding credit card balances</a>, with $34 billion still owing, they remain the scourge of most families.
It's fair to say credit cards are the most potent weapon of mass financial destruction since the loan shark. Their convenience and flexibility means it's so easy for them to get out of hand and lead to serious financial distress.
We need to be vigilant in ensuring our credit cards work for us and don't destroy our finances. To avoid getting into trouble in the first place, or get back in control of an existing debt, here are our five golden rules for using credit cards.
- Pay off the most expensive debt first
This is a basic part of <a href="http://ireport.cnn.com/docs/DOC-1086108">financial management</a>, but still so many people put their money in different piles without realizing it's costing them in interest. When you have a high interest debt, such as an big credit card balance, paying it off must be your priority.
If that pile of expensive debt looks like it'll take a while to pay off, consider moving the balance on to your lowest interest rate loan. If this transfer carries a fee, you can use an online calculator to do some rough sums to make sure the interest savings are worthwhile.
- Repay more than the minimum amount
To reduce credit card debt you have to make more than the minimum repayment.
The minimum just means you avoid late charges and can continue using the card. It might not even cover the interest accrued each month, and that's trouble.
<a href="http://imgfave.com/collection/316144/Corliss-Online-Group-Financial-magazine">Compound interest</a> (interest paid on interest) is a powerful thing when you're saving, and when it's going against you it's just as powerful in blowing out your debts. If you're really struggling to make repayments, set up a direct debit so that each pay cycle the credit card gets paid off first.
- Get the best deal
Don't get sucked into rewards programs or account keeping fees if you're not benefiting from them. A common misconception is that fees on financial products mean a better service or features, but that's not right. There are plenty of fee-free cards that offer similar credit limits, flexibility and terms.
- Be aware of interest-free periods
No doubt you've seen credit cards offering interest-free periods for new purchases or balance transfers, but do you know what they mean and how to take advantage of them?
Usually the interest-free period starts at the date of your last statement, not when you make a new purchase, so it's important to know your billing cycle to avoid paying interest.
Also, in most cases you only get the purchases interest-free if you pay off your entire credit card balance by the due date each month.
- If you can't afford it, don't get it
For a lot of plastic-happy shoppers, the debt spiral ends in the pretty simple realisation that they can't afford to have a credit card. So if you lack the financial capacity or self-control to service a high interest debt, cut up the credit card before it becomes a problem and ask the bank to stop offering extensions. With debit cards able to perform a lot of the functions that were previously only available to credit cards, you can get by all right with the savings based alternative.
By sticking to these five rules when swiping your credit card, those soft drinks and comfortable shoes won't end up costing much more than the marked price.