The use of credit in the U.S. is ubiquitous. The U.S. Census reports that 160 million households use credit cards, with an average household credit card debt of $15,799. Credit allows Americans to purchase cars, furniture, food and other items and pay back the money over time. But credit is like a sharp knife in the kitchen. Handled carefully, it can make life easier. Handled poorly, it can inflict great pain.
"It's not bad to have debt - but you have to manage it and not fall into credit traps that let the debt get out of control," said Cassandra Taylor, a financial guidance counselor at the Duke University Credit Union.
Since 2004, the U.S. government has recognized April as National Financial Literacy Month. It is a time to improve Americans' understanding of finances and ensure all Americans have access to trustworthy financial services and products. At a recent Duke Credit Union seminar, Taylor helped increase financial literacy by sharing five credit traps that can snare the unwary into excessive debt and damaged credit.
Expensive credit. Payday loans, tax refund loans, pawn shops and rent-to-own schemes often charge fees or excessively high interest. "If you owe 20 or 25 percent interest on a loan, you need a lot more money to pay it back," Taylor said. "It's easy to dig yourself deeper and deeper into debt."
The minimum payment trap. By law, credit card companies now include on statements how long it will take to pay off debt making only the minimum payment. That calculation, however, assumes no new purchases on the account. "If you only pay the minimum amount, you pay interest for a longer time," Taylor said. "You can end up paying for items long after their useful life is over."
Paying late. Paying a bill late can leave a black mark on your credit score and cost you more money. Credit card companies can raise your interest rate on new purchases after just one late payment, although they must give you a 45-day notice of the new rate. If your payment is more than 59 days late, they can raise the interest on your existing balance. "Don't lose track of when the bills are due," Taylor said. "It can be an expensive error."
Hidden fees. Check the fine print on loans and credit cards for charges related to balance transfers, as well as annual fees, late-payment fees, replacement card fees and extra fees for purchases made abroad. "There are some credit cards that charge extra if you don't use the card enough, and other loans that will charge a fee if you pay back faster than expected," Taylor said. "Always read the fine print."
Special offers. Stores often offer "buy now, pay nothing for 90 days" specials. Check the fine print - often the store charges interest during the months before you start paying off the item. Credit cards that offer "introductory rates" on balance transfers often use the lower interest rate only for the balance, not for new purchases. "Again, read the fine print," Taylor said.
"I often feel like a broken record, but the advice we give most often to our members is to use credit wisely by having a spending plan, paying bills on time and understanding the fine print," Taylor said. "That allows credit to be a useful tool, rather than a burden."