by Maurie Backman | Published on Oct. 23, 2021
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If you have credit cards, here's one situation you should try to avoid.
Credit card companies don't operate out of the goodness of their hearts. Rather, their goal is to make money, and they do so in several ways. These include charging annual fees to credit card holders, imposing fees for cash advances, and collecting interest on balances that are carried forward.
The latter is a huge source of income for credit card companies. In fact, a new report by The Ascent reveals that in 2020, the credit card industry took in $76 billion in interest income alone. That's a great thing for credit card companies, but for the consumers who had to pay that interest, not so much.
If you routinely carry a credit card balance rather than pay off your cards in full every month, you should know that you're boosting credit card companies' earnings -- and hurting your own finances in the process. And that's a mistake to avoid whenever possible.
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Sometimes, credit card balances are unavoidable. If you run into a financial emergency and don't have the money in savings to cover it, you may have no choice but to carry a balance on a credit card temporarily.
But some people end up carrying credit card balances not because unplanned expenses arise, but because they don't do a thorough enough job of tracking their spending. And that's a scenario you should try not to land in -- especially if money tends to be tight.
So how do you avoid carrying a credit card balance? First, set yourself up with a budget to follow. That budget should account for your various expenses, including those that may not pop up every month (like holiday spending). Knowing how much you can afford to spend in different expense categories could help keep your credit card balances in check.
Next, make a point to check your credit card balances every week. It's easy to swipe a credit card at the store and forget how much your total came to a day later. But if you review your spending regularly throughout the month, you may be able to avoid charging more and winding up with a bill you can't pay in full.
Finally, do your best to build some emergency savings, whether by cutting back on expenses temporarily or getting a second job and using your earnings from it to pad your bank account. If you have cash reserves to fall back on, you'll be less likely to have to charge expenses on a credit card in an emergency. And you'll have some money to dip into if there's a month when you have to spend more than expected.
While credit card companies love collecting interest, paying it means tossing away money you could otherwise put to good use. It's important to do what you can to avoid carrying a credit card balance. That balance could really hurt you financially, especially if you end up carrying it for a long time.
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