It’s a good idea to limit your credit card debt as much as possible. This type of debt typically carries a high interest rate and is not tax-deductible. There can be advantages, however, to using plastic, particularly in those instances when it’s best not to carry much cash. But now, more than ever you need to use credit responsibly.
Why? Because some credit card issuers are bumping up their late fees and becoming more aggressive about imposing penalty interest rates. With some cards, only one late payment can trigger the late fee and then a new, higher rate. Plus, some credit card companies are shortening or eliminating their grace periods, which previously allowed you a few days past the due date for a payment to arrive before you’d incur a fee.
In short, it’s clear that you should minimize accumulating credit card balances when possible. Your best bet is to keep just one card, use it only in cases of emergency and pay it off each month, so that you’ll avoid interest or finance charges. In fact, paying off any high-interest credit card debt may be one of the smartest financial moves you can make. After all, you could be paying interest rates of 18 percent—or more—on some credit card debt. Unless you can find an investment that returns more than that—which is unlikely—you’ll make better use of your money by paying down that debt. Of course, your best credit card debt-reduction strategy is to avoid getting into debt in the first place. And one of the best ways of doing that is to build a “cash cushion” over time. By setting up monthly automatic payments into a liquid vehicle, such as a money market account, you’ll be able to accumulate funds you can draw on to make major purchases—the type of purchases that might otherwise send you reeling into the “plastic trap.”
Still, because your money market account is so liquid, you’ll have to fight the temptation to constantly dip into it for everyday or “impulse” purchases. Remember what this account is there for, to help you stay out of debt.
You also can find other options to racking up credit card debt. One popular choice is a home equity loan. This type of loan typically carries a much lower interest rate than those of credit cards, and your interest payments are usually tax-deductible. Plus, you can use the money for whatever you want: home improvements, college payments, whatever.
However, before you take out a home equity loan, there are a couple of things you must keep in mind. First, you’re using your home as collateral for a loan. If you default, you could lose your house—so make absolutely sure you can handle the payments before you sign on the dotted line. Second, taking out a home equity loan is a major decision—so consult your tax and investment professionals for guidance.
By taking the appropriate steps, and by disciplining your spending habits, you can avoid falling into expensive credit card debt. And that’s a tumble you never want to take.