Financial Rules of Thumb: Never Carry a Credit Card Balance
We’ve been talking over the last few weeks about financial rules of thumb, and whether they apply across the board to everyone as we’ve been told. So far, we’ve talked about emergency funds, down payments, saving for retirement and the 100-minus-age rule.
Today, I want to talk about the conventional wisdom that you shouldn’t carry balances on your credit cards. This rule is, in fact, 100 percent spot-on. I can’t think of a time when I would recommend that someone not pay off their credit card balance each month.
Unlike most loans that currently offer low interest rates, many credit cards come with interest rates of 15 percent and higher, with several upwards of 22 percent. It doesn’t take very many months of carrying a balance for that to really bite you in the wallet.
You may be wondering about those cards that offer zero percent interest on balances or transfers for a certain amount of time. Well, what many people don’t realize is that if you don’t pay off the balance by the end of the intro period, you’re hit with all that retro/backdated interest in one big charge. That’s right – read the fine print. You’ll be charged for all the interest you supposedly saved if the balance isn’t paid off.
I do understand that sometimes emergencies come up, and this is why I always recommend that you keep an emergency fund that works with your financial situation. That way, even if you use a credit card to pay for the unexpected expense, you have the money to pay that bill without accruing interest.
All this said, I do recommend that most people carry a credit card to help build credit and practice responsible spending – as long as you can pay it off each month.
As always, if you have any questions about credit card usage or any other budgeting and saving topics, feel free to give me a call.