Overspending with Credit
If your last name is Trump or Hilton, read no further. If, however, you're like most of us, saving money -- or if you prefer, cutting costs -- is a challenge that occupies a good part of your waking life. And it's a task that has become exponentially tougher in the past year, as price tags on essentials such as food, clothing, and gasoline have skyrocketed. (How bad is it? In the first half of 2004, the cost of gasoline increased by 50 cents a gallon, or 34 percent; and in June, the U.S. Department of Labor announced that prices for food in May had gone up nearly a full percentage point, the largest increase in 14 years.)
Now, with interest rates -- after years of hovering near all-time lows -- starting to rise as well, the importance of getting a handle on your expenses is even more crucial. The problem is that most heads of household feel, not unjustifiably, that they're already running a pretty tight ship.
So how do you cut fat if there isn't any? The truth is that opportunities to save money exist, no matter how frugal you are. They're just easy to overlook. What follows are 10 common money blunders that even financially savvy parents commit -- and how to correct them.
Overspending with Credit
The myriad ways that otherwise responsible Americans fall prey to the perils of plastic are almost dizzying. First and foremost, of course, is the common problem of relying on credit cards to live beyond one's means and then paying dearly for the habit. A shocking 48 percent of credit card holders make only the minimum payment each month, according to Bob Currier, director of education at American Consumer Credit Counseling in Newton, Massachusetts.
This extraordinarily expensive way of borrowing money (for that is exactly what you're doing) is, says Jennifer Openshaw, author of What's Your Net Worth? (Perseus, 2002), "absolutely the biggest mistake you can make with credit cards." Given the sky-high interest rates commonly charged (they can run upwards of 20 percent), paying only the minimum effectively means that the consumer will never get out of debt.
Openshaw offers a sobering example: If you start with a $7,000 balance and pay only the minimum each month, it will take 45 years to pay it all off. Plus, she adds, "you would end up paying about $15,000 in interest on your original $7,000 debt." It is difficult to conceive of a bigger waste of money than this.
Paying off your entire balance each month just makes financial sense. If you can't manage that, either negotiate with your card issuer for a lower interest rate or, if that fails, transfer the balance to a card with a lower interest rate (check out cardweb.com or abcguides.com for possibilities).
What few people realize is that, in addition to its other pitfalls, carrying an unpaid balance negates one of the most attractive features of prudent credit card use -- i.e., the wonderful "float" you get when you charge something on, say, June 8, yet don't have to pay for it until July, with no interest accruing. This grace period disappears when there's an unpaid balance because banks calculate interest on your "average daily balance." That means the moment a charge goes onto your card, it becomes part of that balance and hence starts accruing interest immediately.