To Manage Finances, Consumers Must Understand Credit Cards

Learn to Manage Credit Cards

Credit cards are an important part of consumer finance. Understand them well! (Photo: flickr.com)

Consumers are suffering financially due to the recession and need to know how to manage their credit cards, savings and investment accounts. In today’s society, credit cards are a staple. Their convenience and many uses make them one of the easiest ways of purchasing items. Unfortunately, they are also a very easy way to get into financial trouble if consumers are spending more than they earn. Not using or establishing credit can also be detrimental. Most consumers cannot afford big-ticket items like homes, cars and large appliances without the use of credit. Because of the importance of credit, consumers need to understand how to manage it. Here are types of credit to understand and use wisely.

What is Installment Debt?

Installment debt is what allows consumers to get a 30-year home mortgage at eight percent or a car loan at nine percent. Credit is extended for the item, and then the loan is repaid throughout a set amount of time on an amortization schedule. Monthly payments are a fixed amount over the course of the loan. The loan repayment begins with mostly interest being paid off, but later principal is repaid.

Installment debt can easily be budgeted. Once a consumer knows what their payment is, they can work it into their monthly expenses. Installment debt can be good debt if a consumer earns a higher return on the investment of cash, and then they pay on the installment debt.

Revolving Credit

Revolving lines of credit, also referred to as “open-ended credit,” is available to consumers from Visa, MasterCard, American Express and department stores. When a consumer applies for these cards, they get a standard credit limit based on their credit rating and can use it for purchases. Again, there are monthly payments to consider and some lines of credit also have monthly and annual fees.

Although revolving credit can be convenient, consumers need to understand that paying minimum payments benefits the credit company. Because many credit cards charge rates upwards of 18 percent, it pays for you to not pay more than the minimum. Companies make huge revenues from interest payments. For example, paying the minimum on a $2,000 credit card loan could mean making only interest payments for the next decade.

There are some benefits to revolving credit. Consumers can purchase items they normally couldn’t afford and spread out payments. Unfortunately, many people go overboard with their credit cards and end up in serious financial trouble. Spending more than is coming in is always a dangerous decision, but consistently doing it can mean a quick financial demise.

Using Credit Wisely

Regardless of the type of credit consumers have, they need to use it wisely. One way to do this is to examine every loan agreement and see exactly what the fine print says. Keep track of all rates, balances and fees to understand how much money is truly being used for beneficial purposes and how much is going directly to credit companies.

Eliminating Credit Debt

Some people are opting for completely eliminating credit card debt as a response to the economy. If consumers think this is the route they want to take, they should first evaluate their individual spending habits and see where money drains are. It is relatively simple to track money and where it goes with a little diligent research. Problem areas will show themselves and consumers should immediately find ways to eliminate them. Then, based on current spending habits, consumers should recreate a better budget that allows them to pay off debt on credit cards, pay bills and manage expenses.