If you can momentarily think of plastic as another source of instant cash that you already have put away somewhere, then you are set to beat credit card psychology. The real eye opener to save a lot of money using credit cards is by limiting the use to categories of spending.

Use of instant money for limited premeditated purchases and looking at credit cards as the last resort is the key. You can control this by taking a long hard look at what it’s costing you to carry around those credit cards in your wallet. To do this, simply create a chart on a piece of paper.

Start by drawing three vertical columns. In the first column, enter your user fee for the credit card(s) you carry. In the second column, enter your interest charges for the last 12 months for each card. In the third column, enter your annual cost for carrying the card by adding column one and column two. Then total all your credit card costs at the bottom.

If the number at the bottom is a shock to you, then it’s time to take action!

To better understand credit card institutions and how they function, there are three basic types:

1. Bank Cards like MasterCard and Visa charge a yearly fee of up to $35 or more, with an average of $18. Interest rates vary from state to state with an average around 16 percent.

2. Travel and entertainment cards like AMEX and Diners Club charge annual fees ranging to $350. Typically, you pay off what you owe each month with no finance charge.

3. Department store cards have their own cards, and they do not charge an annual fee, but do often charge interest rates higher than bank cards – amazingly up to 24 percent.

Credit cards have always been, and always will be money makers for financial institutions. Besides the high interest they charge the consumer, they receive another 1 to 6 percent in account service fees from merchants who buy a credit card franchise. It’s no surprise when you become Pre-Approved for a new credit card. The financial institution is poised to make a whopping 24 percent or higher by extending your credit.

Credit card lenders make it easier for you to pile up your debt by offering to let you pay off only a small portion of the outstanding balance each month. These smaller payments will allow you to hold more cash each month, but this adds up to be a unwanted major expense.

For example, you have a balance of $500 at the beginning of the month and the credit card company allows you to make a minimum payment of $35. During the month, you charge another $100. The interest on your account is 18 percent, which is computed as 1.5 percent of the unpaid balance. The interest charges are added after you make your payment, however, many credit card companies compute interest on the average daily balance, which result in even higher charges.

Your minimum payment sends your balance to $465. Adding the interest raises it to $471.98, and your new purchases take it to $571.98. If you make another $35 payment, the next month’s interest charges will be based on $536.98. For the second month, your interest will be $8.05. This is nearly one fourth of your minimum payment, which is interest on top of interest. If you continue to charge more than you pay off, you will continue to accumulate interest on interest, as well as on your charges, you’ll soon discover there’s no chance of paying off the debt.

As long as you are making the minimum payment on a regular basis, the credit card lender will encourage you to borrow more, even offering to raise the maximum line of credit, especially if you get too close. To get a handle of the situation, make a checklist for categories of spending.

a) If you carry multiple credit cards, keep only one bank card, one travel card, and the most useful department cards. Destroy the rest. Carrying multiple cards only encourage unnecessary spending.

b) Avoid upscale cards that has prestigious appeal with gold, silver, or platinum higher line of credit packages. They charge higher interest rates for that line of credit, which is by no means a bargain.

c) Shop around for bank cards, even though they are the same, what you pay for them is not. Some charge no annual fee, while others up to $35. Some charge less than 6 percent interest, while others charge 24 percent. The highest annual percentage rate is often charged by major bank card advertisers, which you bear the cost in user fees.

d) Apply for a credit union credit card. They usually offer more favorable terms than bank cards, however, they do require a membership with other value benefits for premium use of their card.

e) Pay the full amount back that you charged – every month. Take advantage of paying off your balance to avoid finance charges.

f) Do not use department store cards for big tickets items. If at all possible, borrow the money from a bank at a lower rate.

g) Compare credit card’s finance charges with others you may have. While these charges may vary, your bank card might be lower than your department store card.

To save more money and reduce credit card costs, try not to charge more than you can pay back in a month. If a larger amount is charged, don’t just make the minimum payment, pay at least 40 to 50 percent of the outstanding balance.

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