Here we go again. It's holiday season, and companies have already been urging us to spend, spend, spend on our loved ones for several weeks now.
Now this is all well and good for many of us and many purchases. (And for such occasions, may I recommend our own spiffy Motley Fool credit cards? I've used one for quite a while and it often serves as a great conversation starter. It even offers cash back or rewards -- I've got $106 coming back to me on my Fool card.)
The problem with this promotion is that it will encourage some people to charge more than they otherwise would have, in order to try and win. And even putting the promotion aside, the mere existence of credit cards threatens to financially damage many of us. How, you ask? Well, because they permit us to buy whatever we want, whether we can afford it or not. And that's especially tempting and dangerous during the holiday shopping season.
Consider this scenario: You rack up $1,000 in charges that you can't immediately pay off and you face a 16% interest rate on your card. That translates to $160 in interest payments over a single year. Would you buy a house with a 16% mortgage? I thought not. But many people let their debt "revolve" from year to year, at steep interest rates. If you don't pay off that $1,000 quickly and instead gradually add to it, you might find yourself owing $5,000 -- which would still have you well below the average debt among households with credit card debt. Again at 16%, that $5,000 would cost you $800 per year in interest! That $100 sweater you bought for your niece that you've never seen her wear? You'll be paying $16 extra in interest for it each year -- until you pay off your debt.
If you end up like many people, whacked by universal default rates of 30% or more, you'll be paying $1,500 in interest annually on $5,000. Yikes!
Proceed with caution this holiday shopping season, dear Fools. Don't buy what you can't afford. Remember that a simple homemade present can cost less and be treasured more than many more pricey items.
Instead of paying out 16%, why not aim to earn 12 % to 16% or more on your money -- by investing it in some carefully chosen mutual funds. We'd love to introduce you to some in our Champion Funds newsletter. One fund, recommended in May, sports an average annual return over the past five years of 20%, and recently included among its top holdings Hess
Keep more of your money
Learn much more about the surprisingly interesting credit card industry in our Credit Center, which also features tips on getting out of debt, along with guidance on how to manage your credit effectively. Really. I mean it. There's some great stuff in our Credit Center, and it's all free reading.
The following articles can also help you:
- The 8 Commandments of Credit
- The Best Low-Interest Credit Card?
- I Caught You Looking!
- Urban Credit Legends Exposed!
- $24 Billion to Card Companies. for What?
MasterCard is an Inside Value recommendation and Best Buy is a Stock Advisor pick.
Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article.