Credit card debt is a major problem for many Americans, with Creditcards.com reporting that the average U.S. adult carries $4,878 in credit card debt, excluding zero-balance cards and store cards.
Although there are situations where using your credit card could be the best financial option, too many people use their cards in ways that make it so they can't pay them off, resulting in the burden of high-interest credit card debt.
Major purchases when you don't have the money
Without a credit card, you would have to save up over time to buy that new entertainment system, but with a credit card it can be yours right now. However, that $1,000 purchase quickly becomes much more expensive when you can't pay the bill and double-digit interest rates begin to take effect.
Flickr / Vincent Van Der Pas.
Right now, the average credit card rate is just over 15%, so after one year, you would owe another $150. But wait two years and you would owe not $300 extra but rather $323, thanks to the magic of compound interest. And this extra cost doesn't even take into account other credit card fees.
The bottom line here is that a credit card is not a free pass to make purchases to be paid off sometime in the future. For big-ticket items, it's wise to set aside the money ahead of time to cover the bill.
Cash advances
Credit card companies are perfectly willing to lend you money, but they won't be doing it for free. The double-digit interest rates seen on carried balances are frequently applied to cash advances, making for expensive short-term loans.
Flickr / jeremybrooks.
Obviously, the best solution would be to avoid needing the cash advance in the first place by maintaining adequate savings and reducing spending. But sometimes, tough times make neither of these possible. In these situations, it's best to consider alternatives including loans from family and friends, as well as from small community banks and credit unions.
One of the few times a cash advance from a credit card would be the best option is when a loan from a payday lender is the only alternative. Although credit card interest rates currently average around 15%, payday lenders can easily charge 10 times that amount.
Certain foreign transactions
When you're within your home country, you don't need to worry for the most part about exchange rates and foreign transaction fees. But traveling to another country is a whole new story.
Many cards charge a foreign transaction fee when used outside their home country, with fees often being 2% to 3% of the purchase. When it comes to major purchases such as hotels and rental cars, this fee can really add up.
Beyond the foreign transaction fee, consumers need to look for the exchange rate the card will be using. Websites such as Xe.com quote live market rates and can be used for general estimating, but credit card companies have their own rates, which could make a purchase a little more expensive.
Before traveling to another country, it's best to find out which credit cards offer the best exchange rate without a foreign transaction fee.
The bottom line
Credit cards are useful tools for convenience and rewards, but using them in certain situations can cost you a lot more than you could ever get from their rewards. It's always best to make sure you have the means to pay off a credit card before charging a purchase to it, so as to avoid falling into a cycle of credit card debt.
Flickr / images_of_money.
When it comes to knowing the terms of your credit card, whether for foreign travel or for interest rates, you should both review your credit card contract and contact the credit card company.
