The best way to buy something is to save up the cash you need and then make your purchase. This way, you will not be charged any extra fees or interest on your purchase, you'll only pay what the item costs.
Of course, this is not always possible. Sometimes you don't have the cash available. In such cases, the next best option is to purchase an item with a credit card, but then pay off that card's balance in full once the bill comes due.
If you do this, you will not be charged interest on your purchase. When you do not pay off your credit card balance in full, interest is billed on the remaining balance. This is where credit cards have the potential to be costly.
The impact of interest
Say you buy an $800 laptop computer with a credit card that comes with an interest rate of 18 percent. If you pay only the minimum payment on that debt each month -- in this case, $16 -- it will take you 94 months to pay off that debt, and you will have paid an additional $689 in interest.
That means that you'll end up paying nearly $1,500 for that $800 laptop computer.
Depending on your credit card balance and the amount of time it takes you to pay your balance off in full, you could be paying hundreds, or even thousands of dollars in interest.
In addition to paying interest on a credit card, there may be other fees as well.
Some credit cards charge annual fees that you'll have to pay whether you use the card or not. However, there are plenty of credit cards available today that don't have annual fees.
If you make your payment late, not only will you incur a late fee, but many credit card companies increase your interest rate. This means that your rate could increase from 14 percent to 29 percent.
Additionally, if you go over your credit card's spending limit you'll potentially face a fee.
Finally, be careful about taking cash advances on your credit cards. The costs for these vary according to the financial institutions issuing the credit card, but they can be substantial.
If you use credit cards, be cautious. Your best bet is to pay off your balance every month.