How Credit Can Help—and Hurt
Using credit wisely.
Our two cents
Our two cents
Already have a high balance? Consider putting your credit cards away and using cash or a debit card until you've paid the balance down. At the same time, make plans to pay off your balance as soon as possible.
Credit is a powerful tool. It's convenient and especially useful in emergencies. But it's also easy to let it get out of hand. Why should you be concerned? Consider this example:
If you had $3,000 of credit card debt with an annual interest rate of 14%, and you paid off $100 per month (and had no additional charges), it would take you approximately 38 months to pay off your balance. And, more importantly, you would end up paying over $700 in additional interest—almost a quarter of the original debt.
The cost of credit card debt
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Original DebtOriginal Debt$3,000$3,000
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Original DebtInterest Rate$3,00014%
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Original DebtMonthly Payment$3,000$100
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Original DebtMonths to Pay Off Debt$3,00038
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Original DebtCost of Interest on Debt$3,000$716.72
Source: Schwab Center for Financial Research. Assumes an interest rate of 14%. The amounts shown do not reflect any fees or penalties. This example represents a hypothetical debt scenario and is for illustrative purposes only. ©2017 Charles Schwab & Co., Inc. All rights reserved. Member SIPC. (0116-3593)
In this scenario, you would pay over $700 in interest alone. This assumes no new debt is added to the original figure. This debt would take 38 months to pay off, or more than three years.
Make your own calculations.
If you have credit card balances, you might be surprised to see how much those balances are really costing you. Use our cost-of-debt calculator to determine the total cost of not paying off your balance in full every month. And think of what you could be saving if you didn't have to pay interest.
Think about your credit rating.
How you use credit not only has cost implications, but it can also directly impact your overall credit rating. Lenders can view your entire credit history when deciding whether to issue a car loan or home mortgage. Landlords and employers often have access to credit reports as well, so credit can even impact your ability to get an apartment or job.
What's more, this information can be tied to you for years, so if you make poor financial decisions when you're young, they could haunt you well into the future.
Learn more about understanding your credit score.
Follow these credit card dos and don'ts.
Credit cards can be useful for many purchases, and they certainly are easier to use than checks. But before you pull out the plastic, make these basic guidelines part of your own credit management plan:
Follow these credit card dos and don’ts.
Follow these credit card dos and don’ts.- Do:
- Don't:
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Do:Shop around for the right card. Look for features and rewards that best meet your spending needs. Always read and understand the fine print.
Pay off the entire balance on time every month.
Know the minimum finance charge in case you occasionally have to carry a balance.
Consider using your credit card for emergencies only.
Keep track of every credit card purchase each month so you don’t overspend.Don't:Don't pay bills late. Late fees and interest payments are expensive, and overdue balances can also negatively impact your credit rating. Charge only as much as you can afford—or less.
Don't use a credit card for purchases less than $10. These small purchases can add up fast. Use cash instead.
Don't carry a balance if you can avoid it. It's best to pay off the entire balance before the end of the grace period so you don't have to pay interest.
Think twice before closing a credit card.
Think twice before closing a credit card.Your credit score is based partially on your utilization ratio, which is the amount of debt you have compared to your available credit limit. So if you close cards but still carry the same amount of debt, your utilization rate is likely to go up and your credit score may go down.