Credit cards are an easy and often rewarding payment option in our daily lives, but they have the potential to cause harm if we’re not careful. Some consumers pay off their outstanding balance each month and use their cards to earn rewards. Others have balances that can’t be easily paid off or managed.
According to NerdWallet, the typical American household carries over $15,000 in credit card debt. It’s easy to attribute this to over-spending and poor money management skills. This may be true in some cases, but it’s also important to understand that over the past 12 years, the cost of living in America has grown at a much faster pace than income. Many of us pay more for simple products and services than we can afford. This is especially exaggerated in some areas in Colorado, like Boulder, where the cost of living is 21% above the national average. While these are just two of the many reasons surrounding the amount of credit card debt in our country, the reality is there are many complex factors at play.
Some ways to choose and wisely use credit cards:
- Stay informed. Rates and rewards on credit cards are constantly changing. Keep an eye on what other cards are offering. For example, if you use your card and pay if off every month, you probably want a rewards card. Decide which rewards are best for you and find the card that gives the best rewards in that category. Cashback rewards are very popular—some cards give as little as 60 cents per point and some give as much as 1 dollar per point. On the other hand, if you’re going to carry a balance, pay attention to the interest rate of the card. For balance carriers this can result in huge savings. For example:
If you have a $1,000 balance on a card with a 20% interest rate and make the minimum payment each month, it would take you 195 months to pay it off and cost you $2,126 in interest over that time period. In contrast, if you had the same $1,000 balance with a 9% interest rate, and you still only made the minimum payment, you would pay off your balance in 86 months and only pay $343.55 in interest over that time.
- Know before you buy. If you’re going to purchase a product or service and won’t be able to pay cash or pay off the charges on your card, calculate the total cost of the interest you’ll pay based on how much of a payment you can make before you buy. Using the example above:
If you’re buying an item for $1,000 and know you can only make the minimum payment, are you willing to pay $3,126 in total for that item?
- Read the fine print. Every credit card has fees, interest rates and requirements. If you’re considering a new credit card, or perhaps you already have a card but have never read the fine print, look at the credit card agreement form in detail. Most credit cards have different interest rates based on the type of transaction. Using your credit card at an ATM often results in a much higher interest rate than if you used it to purchase a product at a store. Most credit cards will also raise the interest rate automatically if you’re late on a payment. You can save a lot of money simply by understanding exactly how your card works and all the factors that affect your rewards and interest rate.
While your unique financial situation and spending habits play a key role in how to choose and use your credit card wisely, a little research and planning goes a long way, and can even save you money in the process.
Interested in what using a credit card wisely might look like for you? Talk to one of our Financial Solutions Guides, or try out our financial calculators.