Avoid the Money Drains—and Save

Often, when you approach the entrance to a military base, you pass through a gauntlet of pawnshops, rent-to-own stores, and payday-loan/check-cashing businesses. It’s hard to ignore that these businesses exist, but you certainly don’t have to give them your money. In this chapter, let’s look at common money drains and suggest ways to avoid them. In case you fall into a money trap, the checklist will offer ways to help you climb out of debt—and build your savings.

Credit Cards

	A credit card can have a place in your life—if you handle it carefully.

Credit cards are handy—and seductive. When you’re moving, it can be convenient to use the card to pay for expenses. However, when the bill comes, you could wind up paying 18 percent or more in interest if you can’t pay the full amount. A credit card can have a place in your life—if you handle it carefully. For example, you often need a credit card to rent a car or make an airline reservation. But caution is the key. To manage a credit card wisely, consider the following guidelines:

• Talk about credit with your spouse and agree on how you both will manage credit card spending.



• Have only one major credit card. Multiple cards mean numerous chances to build debt. Also, it’s less expensive in the long run to pay a larger amount on one card than to make minimum payments on many.



• If you have store credit cards, stop using them—they typically charge the highest interest rates (up to 22 percent or more). If you are asked if you want to open a store card at checkout to receive a discount on your purchase, decline the offer unless these two conditions exist: (1) you know you can immediately pay off the entire purchase amount, and (2) you haven’t requested credit in six months.



• Shop for a card with no annual fee and a lower interest rate. The Internet is a great resource. Try the Bank Rate Monitor site. If you belong to a credit union, find out what types of credit cards it offers. Credit unions often charge lower rates on credit cards.



• When paying your credit card bill by mail, send your payment several days before the due date (at least a week). This is very important! Credit card companies typically require that payment be posted to your account by a certain time of day on your due date or they will charge you a late fee. Take extra care to mail your credit card payments early enough so they can be posted to your account on time. When making the payment over the Internet or by phone, find out when the payment will post to your account. Some companies wait a day or two before posting your payment, so you need to make the payment a day or two before the due date. Late payments are expensive (often $30 or more) and hurt your credit history.



• To avoid interest charges, pay off the entire balance each month by the payment due date.



• Keep your credit limit low, preferably around $2,000 or $3,000. This will ensure you don’t fall too deeply into debt. If the credit card company automatically raises your limit, you always have the option of telling them to reduce it.



• Beware of cards that offer low “introductory” interest rates. This rate usually is only for a short time—often around six months. Find out what the rate will be after the introductory period. If you make a late payment or charge more than your credit limit, your interest rate could jump overnight.



• To stop most credit card offers from coming in the mail (a process known as “opting out”), call 1-888-567-8688 or visit www.optoutprescreen.com. The toll-free number and Web site are operated by the major credit reporting agencies.

Cash Advance Checks

Tip: Tear up or shred checks that credit card companies send with your bill or in separate mailings. Although it can be tempting to use the check for something you want, it will be costly. The amount of the check is considered a “cash advance.” Interest rates for cash advances are usually high and the credit card company will begin charging interest immediately.

Save Big Bucks on Credit Card Bills

If you pay more than the minimum payment on your credit card bills, you can save thousands of dollars in interest. For example, assume you owe $1,000 on a credit card that charges 18 percent interest; you must make a minimum payment of the greater of 2% of the balance or $20 per month. If you make only the minimum payment, which in this case is $20 (2% of $1,000 = $20), it will take you almost eight years (94 months) to pay off the debt and you will have shelled out about $1,862 ($1,000 paying back the principal plus $862 in interest). But take a look at how paying more than the minimum payment will save you big bucks:

Check-Cashing Stores Off-base check-cashing stores will cash checks for a fee of around 4 percent to 5 percent. That means you’ll pay a fee of $4 to $5 for every $100 you cash. That doesn’t sound like much, but it is a spending leak—draining away money that you can put toward your financial goals.