It's important to remember that credit cards aren't the problem; it's how we use them-or in some cases, misuse them-that gets us into trouble. The goal of this article is to give you the tools to use credit cards wisely. In doing so, you can build a good credit history. And, if you have a good credit history, you'll be rewarded by getting loans at lower interest rates that save you money you can achieve your financial goals.
According to creditcards.com, in 2006 plastic card purchases surpassed the use of cash and credit cards combined. According to data released on April 26, 2018, by the American Banking Association, there were 364 million open credit card accounts in the United States as of the end of 2017. That number includes 185 million accounts held by super prime consumers (consumers with great credit), 104 million held by prime consumers (consumers with good credit) and 75 million held by subprime consumers (consumers with poor credit). Multiple studies say about 7 in 10 Americans have at least one credit card.
What's the Problem?
The popularity of credit cards in't the problem, nor is the credit card itself. The problem is how we use credit cards. According to Nerd Wallet's 2017 American Household Credit Card Debt Study, the average household that's carrying credit card debt has a balance of $15,482. Many Americans are putting medical expenses on credit cards; and the average indebted household is paying hundreds of dollars in credit card interest each year. If fact, the average household with revolving credit card debt pays $904 in interest annually.
According to the Nerd Wallet study, about 2 in 5 Americans who have ever had credit card debt (41%) reported spending more than they could afford on unnecessary purchases contributed to them going into credit card debt. A third (33%) said that spending on necessities their income couldn't cover contributed to their credit card debt balances.
The increased cost of living, the rising cost of health care, along with years of stagnant wages, has also contributed to American's increased use of credit cards to help make ends meet.
The True Cost of Credit Cards
The true costs of credit cards must be disclosed in the credit card agreement. Lenders and credit card companies are required by law, to provide you with an Account Opening Disclosure and a Credit Card Agreement, prior to issuing a credit card. These disclosures outline all of the costs and fees associated with the card, along with terms and conditions.
Before you open a credit card, be sure to review the following:
- APR, also known as Annual Percentage Rate. This is the interest rate that will be applied to your credit card.
- Annual Fee-Check to see if the credit card has an annual fee. Some rewards cards do charge an annual fee.
- Over-the-limit fee. Some credit card issuers will allow you to go over your established credit limit. However, for the card issuer to assess a fee, you must opt-in to allow your card to go over the limit and be assessed a fee. It's best not to "opt-in" to allowing your card to go over its limit. This can negatively impact your credit, and you will be charged fees.
- Balance Transfer Fees-Check to see if there is a fee for transferring balances from one credit card to another. It's best to find a card issuer that does not charge these fees.
- Cash Advance Fee-It's best not to make cash advances from your credit card. But if you think you may have to one day, it's best to make sure you know if there are any fees for cash advances.
- Replacement Card Fees-This is kind of a rare fee, most card issuers don't charge this fee, but it's always good to know if you might have to pay for a new card if yours is lost, stolen or damaged.
- Late Payment Fees- These fees can be pretty steep. Know what the fee is for paying your bill late, and plan accordingly-whether you pay by mail or online. Know whether your bill must arrive by a certain time on the due date.
Evaluate fees based on how you use the card. For example, if you think you might have to use cash advances, know what the interest rate is, and know that the interest rate is typically higher on cash advances than purchases. Remember, some rewards cards do have annual fees, you'll want to make sure it's worth it for you.
Tips to Avoid Paying Fees
- Ask your issuer for a due date that's easy to remember-for example, close to pay day.
- Use an auto payment service
- Pay online or through bill pay.
- If you do receive a late fee, call and ask that the fee be waived, especially if you typically pay on time.
What happens when you only make minimum payments?
Let's assume your interest rate is 18% and you only pay the minimum of 2% due each month on the balance that you owe:
If you owe $1,800 on credit cards and you only pay the minimum required, it will take you 22 years to pay off that balance, and you'll pay $3,800 in interest charges, so the actual cost of the $1,800 purchase is $5,600.
And, if you owe $3,900 in credit cards and you only pay the minimum required, it will take you 35 years to pay off that balance, and you'll pay $10,100 in interest charges, so the actual cost of the $3,900 purchase is $14,000.
Note: These examples assume that you don't make any additional charges during the pay off years. Experts advise that you always pay more than the minimum, and if possible, only charge as much as you can afford to pay in full when the statement is due.
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By using credit wisely, you build good credit history which will follow and benefit you through your financial life. If you have poor credit history, you may not get loan offers, you may not get job offers, you may not gen an apartment or a mortgage, and you may be denied insurance. Or, you may pay a lot more than someone with a clean history.