Page 198 - digitalliteracy

9.2 Credit Cards: A Tool, Not a Crutch

Before Elena Maria decided to get control over her
money, she made a number of expensive mistakes
that taught her some valuable lessons. Five years
ago, Elena Maria found a beautiful dress at a depart-
ment store. The dress was perfect for her cousin’s
upcoming wedding. It was not on sale, but the store
had only one in her size. When she tried it on, her
sister said she looked like a model and urged her to
buy the dress. Elena Maria hesitated but ultimately
couldn’t resist. The dress cost $350, matching shoes
were $120, and an evening bag was $85, for a total
outfit price of $555.

Elena Maria decided to use her department store
credit card to pay for the dress. Unfortunately, when
the bill arrived, Elena Maria could only make the
minimum payment. Her department store credit
card had an interest rate of 24%, and she continued Digital Vision/Photodisc/Thinkstock
to make the minimum payment each month. It took Be sure to use your credit card wisely.
Elena Maria 5½ years to pay off her purchase. By Too much debt can seriously affect the
that point she paid about $1,000 for her $555 outfit quality of your relationships as well as
(with $442 in interest—more than the cost of the your self-esteem.
dress)!

As you may have noticed, large retailers push for you to sign up for their store credit card
with discount incentives, such as 10% to 20% off your current purchase. They usually state,
“It’s free and easy!” It’s not simply good employee training that motivates sales associates to
ask you to fill out a credit card application, but self-interest. Employees often receive a com-
mission for each person who fills out an application. What governs the efforts of retailers to
recruit more store card holders? Research shows that, on average, a customer who has a store
credit card spends more than a customer without one. In addition, the interest on a store
credit card is typically more than twice that of a national credit card (e.g., Visa, MasterCard, or
Discover). So the retailers’ efforts are grounded in a good old-fashioned business practice—
make money!

By being cautious, you can use credit cards as a tool rather than a crutch. Getting a credit card
with a low credit limit, such as $1,000, can help keep your spending in check and provide you
with both convenient and essential benefits. You can travel without large amounts of cash.
You can make purchases when funds are low or pay for bigger ticket items for which you
might not have cash on hand. Many companies also offer valuable rewards programs or other
perks, such as extended warranties on the products you buy; some may cover the insurance
on a rental car. A credit card is an absolute necessity in an emergency. Without one, you may
not be able to rent a car or make hotel reservations. Yet perhaps most important, if you use
your credit card responsibly and pay off the balance each month, you help build a solid credit
score.

182
© 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution.

sol82612_09_m09_171-194.indd 182 6/29/16 5:19 PM