Today, we continue our series on debt by considering how credit cards can inhibit our financial progress.

•        Credit cards are typically unsecured and used to pay for things that decline in value, so they fall into the bad debt category

•        With rates often exceeding 10%, credit card interest can pile up quickly, due to compound interest

•        Statistics vary on actual usage of credit card debt in this country

•        However, evidence suggests that more than half of people do not pay off credit cards each month

•        In response to subprime crisis, credit card companies are tightening the noose around the necks of Americans by dramatically raising interest rates and fees on responsible people

•        Consider this example to show how damaging credit cards can be

•        $10,000 balance

•        19.90% interest rate

•        minimum payment = 3% of outstanding balance

•        Making only the minimum payment, it would take 25 years and over $22,100 to pay off the debt completely

•        Total amount of payments could be higher if the borrower makes any late payments or if the bank raises rates due to market conditions

•        It’s tempting to open new credit lines to get 10% discount at clothing retailers; this illustration shows why those companies are making you that deal

Clearly, credit cards should be used with care.  In fact, studies show that people tend to spend more money when using a credit card than when they pay with cash.  This is why more and more merchants accept credit cards, even though there is a transaction cost for the merchant for each credit card transaction.

The best practices for credit card usage involve only charging what you can pay off at the end of the month (i.e. not carrying a balance). 

Tomorrow, we will review a plan to pay off your debts in an orderly manner.