Personal Finances

Because your financial problem was brought on, in part, because you have too much debt, you should stop borrowing. But, what if your car keeps breaking down and you're afraid of getting stuck on the road some night? So, you're thinking of replacing it with a used car that costs $10,000. Before you make a final decision to incur the debt, you should understand its costs. The rate of interest matters a lot. Let's compare three loans at varying interest rates: 6, 10, and 14 percent. We'll look at the monthly payment, as well as the total interest paid over the life of the loan.

Now, let's explore the complex world of credit cards. First extremely important piece of information: not all credit cards are equal. Second extremely important piece of information: watch out for credit card fees! Credit cards are a way of life for most of us. But they can be very costly. Before picking a credit card, do your homework. A little research can save you a good deal of money. There are a number of costs you need to consider:

• Finance charge. The interest rate charged to you often depends on your credit history; those with good credit get the best rates. Some cards offer low "introductory" rates - but watch out; these rates generally go up after six months.
• Annual fee. Many credit cards charge an annual fee: a yearly charge for using the card. You can avoid annual fees by shopping around (though there can be trade-offs: you might end up paying a higher interest rate to avoid an annual fee).
• Over-limit fee. This fee is charged whenever you exceed your credit line.
• Late payment fee. Pretty self-explanatory, but also annoying. Late payment fees are common for students; a study found students account for 6 percent of all overdraft fees. One way to decrease the chance of paying late is to call the credit card company and ask them to set your payment due date for a time that works well for you. For example, if you get paid at the end of the month, ask for a payment date around the 10th of the month. Then you can pay your bill when you get paid and avoid a late fee.
• Cash advance fee. While it's tempting to get cash from your credit card, it's pretty expensive. You'll end up paying a fee (around 3 percent of the advance), and the interest rate charged on the amount borrowed can be fairly high.

An alternative to a credit card is a debit card, which pulls money out of your checking account whenever you use the card to buy something or get cash from an ATM. These cards don't create a loan when used. So, are they better than credit cards? It depends - each has its advantages and disadvantages. A big advantage of a credit card is that it helps you build credit. A disadvantage is that you can get in over your head in debt and possibly miss payments (thereby incurring a late payment fee). Debit cards help control spending. Theoretically, you can't spend more than you have in your checking account. But be careful - if you don't keep track of your checking account balance, it's easy to overdraft your account when using your debit card. Prior to July 2010, most banks just accepted purchases or ATM withdrawals even if a customer didn't have enough money in his or her account to cover the transaction. The banks didn't do this to be nice, and they didn't ask customers if they wanted this done - they just overdrafted the customer's account and charged the customer a hefty overdraft fee of around $35 through what they call an "overdraft protection program". Overdraft fees can be quite expensive, particularly if you used the card to purchase a hamburger and soda at a fast-food restaurant.

The Federal Reserve changed the debit card rules in 2010, and now banks must get your permission before they enroll you in an overdraft protection program. If you opt in (agree), things work as before: You can spend or take out more money through an ATM machine than you have in your account, and the bank lets you do this. But it charges you a fee of about $30 plus additional fees of $5 per day if you don't cover the overdraft in five days. If you don't opt in, the bank will not let you overdraft your account. The downside is that you could get embarrassed at the cash register when your purchase is rejected or at a restaurant when trying to pay for a meal. Obviously, you want to avoid being charged an overdraft fee or being embarrassed when paying for a purchase. Here are some things you can do to decrease the likelihood that either would happen.

• Ask your bank to e-mail or text you when your account balance is low.
• Have your bank link your debit card account to a savings account. If more money is needed to cover a purchase, the bank will transfer the needed funds from your savings to your checking account.
• Use the online banking feature offered by most banks to check your checking account activity.