Here's a piece from Kiplinger's that discusses four credit card traps and suggests ideas for avoiding them:
Trap 1: I can easily pay off my debt when I graduate or get a better job.
Droves of college students graduate from I Owe U each year with an advanced degree in debt. They're lured by the promise to buy now and pay later when, presumably, they'll be making "real" money. As a result, the average young adult age 18 to 24 owes nearly $3,000 in credit card debt, according to Demos, a research firm in New York. And that figure doesn't include student loans.
When you make zilch as a student, the prospect of making a five-digit salary after graduation may delude you into thinking you can pay off your credit card debt in no time. The same goes for entry-level workers dreaming of their next raise. In reality, the average credit-card debt increases with age. Americans age 25 to 34 tend to carry a balance of more than $4,000, according to Demos.
With your new independence come a slew of new expenses, including rent, insurance, utilities, furniture and a work-appropriate wardrobe, among other things. You may even decide to go to graduate school. So until your ship comes in, rely on your budget.
If you're already in debt, craft a plan to help you to pay it off as soon as possible. Use this calculator to see what it'll take to pay off your balance. There is really no pain-free solution. You just have to charge less and pay more.
True. I had many friends in school who thought this way and got into real financial trouble. It's just not worth it. It's hard to tell a college student or young employee this, but those of us who are a bit older should certainly know better.
Trap 2: As long as I make the minimum payment, I'll be fine.
Sure, making the minimum payment on time every month will keep you out of trouble on paper, but do you really want to spend the rest of your 20s -- and your 30s -- paying off your credit cards? At 18% interest, a $2,000 balance will take 19 years and cost an extra $2,600 if you make only the minimum payment required each month. And that's if you don't ever charge another penny.
You have better things to do with your money -- and your time. If a 23-year-old paid $55 a month on that debt, he could pay it off in five years. Then, he could stash that $55 a month in an emergency savings account or invest it. Start to save at age 28 instead of age 42 and you're money has much more time to grow. Set a priority to pay more than the minimum each month, even it's just a couple of bucks. See how far extra payments can go to pay off your debt.
The minimum payment is one of the favorite tricks of credit card companies. They make you think that it's "all you have to pay," when if it is all you pay, it will take years and years to work of a balance (and this is assuming that you don't charge anything else in the meantime).
Trap 3: But I need that.
Identifying needs versus wants is where a lot of young adults get in trouble, according to a study by Chase Education First. The lines continue to blur as you try to show your family and friends that you are financially successful, even if it means racking up credit card debt to do so.
This is where your budget comes in handy again. Identify the bills that need to be paid and take care of those first. Then, you can divvy up what's left for your discretionary income. The best rule of thumb to keep your needs and wants in check: If you don't have the money, don't buy it.
You don't need it. What you need is to learn to spend only what you can afford to spend. And after the money is gone, you stop spending -- you don't charge it.
Trap 4: Better late than never.
Replace this thought with a new mantra: Better on time than late. First of all, a single late credit-card payment will trigger a hefty penalty charge, averaging more than $27, according to Consumer Action, a San Francisco-based advocacy group. You also give the card issuer a green light to raise your interest rate too. Penalty rates average 24%, but can run as high as 30% at Citibank, Bank of America and Providian, says Consumer Action.
And thanks to "universal default" rules, a missed payment on one card can trigger a rate increase on your other credit cards, even if you've been a model customer on those accounts. Not to mention your credit score will take a beating. A payment more than 30 days late can remain on your credit history for up to seven years, according to Experian, a credit-reporting bureau. A weak score can penalize you in a number of ways, from not qualifying for a mortgage to getting turned down for a job.
If you have trouble remembering to pay your bill on time, sign up to have the money automatically withdrawn from your checking account each month. Most programs will let you specify whether you want to pay the minimum or your pay your balance in full automatically each month. (We recommend the latter, if possible.)
But if you're missing payments because you just don't have the money, that's a sure sign you're heading for real trouble. Put your card away and get any help you need to set up a payment plan. You can visit The Association of Independent Consumer Credit Counseling Agencies or the National Foundation for Credit Counseling Web sites to find nonprofit credit counselors in your area. They can set up reasonable repayment plans with creditors, as well as help you create a budget that works.
Am I saying the same thing over and over again? Budget your money, spend only what you can afford, and if you do charge something (only for things in your budget), pay off the card every month and on time. Simple advice, but many people have a very hard time following it.
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