credit cards

Low-rate credit card risks

Imagine a world without credit cards. Could you pay for everything you bought this week with cash? Unfortunately, many Americans couldn't without the help of the handy credit card. Credit cards can be a good thing for some, and a debt trap for others. Low rate credit cards can really help you when your cash flow isn't flowing, but the future risks might be worth trying an all-cash, no-credit diet.

Risk No. 1: Unclear on spending

Zero percent APR for a year sounds great until you rack up thousands of dollars in debt and the year-term is almost over. Say you now owe $3,000 and the new interest rate is 15 percent. If you pay the minimum, it will take you 215 months to pay off the card -- and you'll have paid $3,229.26 in interest. If you are tempted to swipe your credit card at the restaurant next time, ask yourself, "Is this worth double what I'm paying?" You can use Bankrate.com's credit card calculator to determine how long it will actually take you to pay off those swipes.

Credit cards make it easy to spend without paying attention. By the time you notice the $50 outing last night, it's too late. Before taking advantage of low rate credit cards, make sure you are in control of your spending habits and can pay the card off in full at the end of the month, regardless of the interest rate. If you are able to pay in cash, do so whenever and wherever possible; you will feel the money, count the money, and see the money transfer to its new owner, allowing you to clearly see how you spend your money.

Risk No. 2: Change in mentality

Some people jump into low rate credit cards because they don't have the money now, but expect, or hope, to have it later. If you don't have the cash now, you probably won't have it later. Americans are simply spending money they don't have, completely changing the way people think about money. Borrowing is OK if you plan to give it back; but some simply can't, especially after their low rate credit card becomes a high rate credit card.

Before the mid-1900s, credit cards didn't even exist, so cash was king. Today, nearly 75 percent of U.S. families use a credit card for purchases, according to the Federal Reserve Survey of Consumer Finances. In addition, the personal savings rate has been increasing significantly in the past two years, which sheds a little light on the American shift in mentality. Understanding the importance of cash is crucial for the betterment of your personal finance.

Risk No. 3: Creating a credit habit

Using a credit card for every purchase can be habit-forming. Some people don't see credit cards as real money, and never truly accept the effect it has on their personal finances and relationships. A low rate credit card draws them in, and it leaves them with a lifetime of financial struggle.

Low rate credit cards can be good

Low rate credit cards aren't always bad if you can handle your spending, realize the importance of cash and avoid using your credit card for every purchase. Get in the habit of paying the balance in full each month and try not to skip any months. Make sure you have the cash before you swipe and save some money for a rainy day. You can start working on your good credit card habits today. Learn more about credit cards in Bankrate.com's credit card section.

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Product Rate Change Last week
Balance Transfer Cards 15.76%  0.01 15.77%
Cash Back Cards 16.44%  0.04 16.48%
Low Interest Cards 11.04% --0.00 11.04%
 
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