Buy Now, Pay Forever

Credit cards are handy. They are convenient little rectangles of plastic that fit in our wallets and allow us to be cash free. Most people have a credit card or two. Some people like to use credit cards for every day purchases like groceries and gasoline, whereas others only use them for emergencies or when they are short on cash. Both of these are fine, because how we pay them off is what makes all the difference.

Credit cards charge interest, and the amount varies greatly from person to person and even from card to card. Credit cards have an APR, or annual percentage rate, which is the interest a customer will be charged on their purchases, balance transfers, and cash advances calculated at an annual rate. So if a customer has a $100 purchase at 12% APR, they will pay $12 in interest for the year. What credit card users often don't realize is that banks will charge a minimum payment that is low enough to encourage the borrower to only make the minimum payment, so that the principal that is owed is not paid down. This allows the bank to keep charging interest on the same principal over and over. To be a savvy credit card user, you'll want to make sure you pay your balances off every month. You often won't pay a penny of interest if you do this. This is especially important if your interest rate is high. Some cards charge up to 30%!

You also should avoid the temptation of having more than one or two credit cards. Some consumers can have more than ten credit cards. This can make keeping track of your finances more complicated, and you risk missing a payment and then paying late charges and higher interest rates.

Always read credit card offers thoroughly. Banks and other credit card companies will often send out enticing offers that say 0% for the first six months, but then they will hit you with a huge APR once your introductory period is up. Watch out for annual fees and inactivity fees. Close accounts that charge these, as there are plenty out there that don't. Some credit card companies will send out checks that can be used to lock in lower interest rates, and these are worth using for larger purchases. Always read the terms that come with the checks to make sure you know what interest rate to expect.

Finally, watch out for cards that increase your limit automatically. This might seem nice, but its done to encourage you to borrow more. Avoid the temptation to spend beyond your means. You should be able to call the credit card issuer and tell them to restore your original limit. If your limit doesn't seem high enough, examine the reasons why and try to fix those instead. An increase in credit could cause more problems down the road.