BOSTON (CBS ) – April is Financial Literacy month and last week we talked about kids and cash. This week I thought we could spend some time on the grownups discussing money skills. Managing your credit is a learned money skill.
Credit is a privilege, not a constitutional right despite what some people may think. Credit allows you to use someone else’s money, the credit card company’s, to buy the goods and service you need or want.
You are borrowing money every time you use your credit card and you do need to eventually pay it back. And if you don’t pay off your balance every month, the credit card company will charge you interest for using their money.
And if you are late in paying your monthly bill or miss a payment, the credit card company has the right to charge you late fees. And they do; $25, late again $35.
When you talk about credit you need to talk about debt. There is good debt and there is bad debt.
Good debt is the kind of debt that eventually increases your bottom line, your net worth. A mortgage normally would be considered good debt for it helps increase your net worth; it allows you to borrow money to buy real estate which hopefully will appreciate with a small down payment of your money. An education loan and possibly a car loan so you can get to work on time would be considered good debt.
Bad debt is your credit card debt that you don’t pay off in full each month. Here you are paying for things you consume. Groceries, shoes for the kids, gas for the car, aspirin for your headaches, dinners out. And you may be paying for those shoes for a very long time.
If you carry a $3,000 balance with a 14% interest rate, and you pay only the minimum each month it will take 20 years to pay it off. That’s longer than many marriages last.
Oh and by the way, you will pay over $3,500 in interest over those 20 years. Credit card companies just love it when you only pay the minimum.