Minimum payments
A credit card can be a convenient payment method that offers plenty of consumer protections, including helping you with merchant disputes and replacing lost or broken purchases. Most cards also come with rewards programs that offer cash back, travel rewards or other goodies.
But the only smart way to use credit cards is to pay them off in full every month. People who pay only the minimums are paying far too much.
Let's say you're carrying a $10,000 balance at 16% interest. The minimum payment, equal to the interest you owe plus 1% of the balance, is $233.33 to start. If you pay just the minimum, it will take you more than 14 years (338 months) to free yourself from the debt, according to Bankrate.com's calculator, and you will have paid an astonishing $12,793 in interest.
Now let's say you boost that initial payment by just $20, and you keep making that $253.33 payment month in and month out. You'll be debt-free in just under five years (57 months) and will pay just $4,291.83 in interest. Round up the payment to $300, and you'll be out of debt in just under four years, paying $3,313.52 in interest.
Better yet: Don't accumulate that debt in the first place. Charge on credit cards only what you can afford to pay in full each month.
Payday loans
Once upon a time (20 years ago), the payday loan industry barely existed, with just a few hundred outlets. Today, they outnumber McDonald's restaurants in the U.S.
This phenomenal growth illustrates how bad we are at math.
The typical payday loan seems straightforward enough. You write a postdated check for $300, to be cashed when your next payday rolls around. In return, you get $270 cash from the payday lender. A $30 fee doesn't seem like much for a 10-day loan, but it translates into an annual interest rate of 365%.
Furthermore, most payday loan borrowers are repeat offenders. They often can't cover the check when payday comes around, so they have to extend the loan and pay another fee. Or they repeatedly run short of cash and turn to this quick but phenomenally expensive resource. The average payday loan borrower initiates nine transactions a year, according to the Center for Responsible Lending.
Ninety percent of the payday lending industry's $27 billion in loan volume is generated by borrowers with five or more loans per year, the center estimates, while 60% of the business is generated by those with 12 or more loans. Repeated payday loans result in $3.5 billion in fees each year.
You have several options to avoid this treadmill. Saving money on a small income isn't easy, but even a modest cushion can help you avoid a payday lender. If you repeatedly run short, a session with a legitimate credit counselor can help you work out a budget and perhaps a debt repayment plan. You may be able to get an advance from your employer or qualify for a small loan from a credit union. Even a cash advance from a credit card would be cheaper than a payday loan.
'Gotcha' fees
This describes a whole universe of penalty fees that bear little relationship to the severity of the "crime" committed.
Ryan Air, for example, charged a woman 300 euros (about $380) for failing to print out her boarding passes before arriving at the airport. (When called on it, the airline's CEO said the woman deserved to pay the fine for being "so stupid.")
Here in the U.S., Spirit Airlines announced it would charge $100 to people who wait until they get to the gate to pay for their carry-ons. The fee is $45 if paid in advance. (Spirit is still the only U.S. carrier charging for carry-ons.)
Budget airlines are far from the only businesses gouging their customers. "Hidden or unexpected fees" was the top reason low-income Los Angeles residents gave for closing their bank accounts, according to a recent study by Pew Charitable Trusts. Some of these bank-less folks now rely on prepaid cards, which are notorious for their many fees. Credit card issuers' fee frenzy, meanwhile, was somewhat reined in by the Credit CARD Act of 2009, which forced issuers to give people at least 21 days to pay and capped late fees at $25. But you may still wind up facing fees to make an expedited payment or if you've opted for over-limit protection.
Some people believe businesses should be able to charge anything they can get away with. That attitude pits ordinary Joes against the fleets of lawyers, M.B.A.s and behavioral psychologists that corporations can hire to construct fees guaranteed to snare the maximum number of people. Which means sooner or later, they'll get you, too.
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Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.
