Our daily routines, including income flow and spending habits, have shifted. As we learn how to manage this new way of living, we might find that it’s a good time to evaluate how we juggle our finances and pay for everyday needs. If you find yourself reaching for your credit card, you’re not alone.
The Experian 2019 Consumer Credit Review* explains the average American carried a $6,194 balance on their credit cards in 2019. Here in Colorado, that number is a bit higher with the average credit card debt clocking in around $6,416. With more Americans working reduced hours due to COVID-19 pandemic furloughs or job loss, these numbers are expected to rise.
If you’re a new Colorado resident, you might already know that the cost of living here tends to be higher than in other areas of the country. Compared to the national average, the cost of energy, healthcare, food, housing, transportation and other living factors is 5.7% higher for those in Denver, 19.4% higher for Fort Collins dwellers and a whopping 36.9% higher for Boulder residents, according to Salary.com*.
No matter where we live, choosing the right type of credit card for our needs and spending habits is key. And, after we have the right card in our hands, it can be beneficial to use credit cards in a way that complements our spending style and benefits our financial health.
All credit cards aren’t equal. Each carries a set of variables that impact their use and payments. A few key details to pay close attention to include rewards programs, interest rates, introductory offers with a limited timeframe, payment minimums, fees, fraud protection services, mobile wallet compatibility, customer service options and partnerships with retailers. You have to choose which card has the variables that work best for you!
Here are five ways to choose and use credit cards wisely.
1. Stay informed about your credit card’s perks and processes.
Rates and rewards on credit cards constantly change, so it’s a good idea to keep an eye on what your current cards and other cards are offering. For example, if you use your card and pay it off every month, you probably want a rewards card. Decide which rewards are best for you (cashback, gift cards, discounts to retailers, etc.), and find the card that gives the best rewards in that category. Cash–back rewards are very popular. Some cards offer as little as 60 cents per point, and some give as much as $1 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.
2. Know how much you’ll spend with interest before you buy.
If you’re going to purchase a product or service and can’t pay cash or pay off the charges on your card in full at the end of the month, calculate the total cost of the interest you’ll pay based on how much of a payment you can make. Do the math before you buy.
Using the example above, let’s say 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 with the interest you’ll accrue over time? This type of calculation can quickly put into perspective the true cost of financing a purchase using a credit card. It might be a reason to consider switching to a card that offers a lower interest rate to make purchases more affordable. It might also be a reason to hold off on making an unnecessary purchase or look for alternatives that are within your budget.
3. Reading the fine print to understand your card membership
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 in detail.
Most credit cards have different interest rates based on transaction types. For example, using your credit card at an ATM often results in a much higher interest rate than if you use it to purchase a product at a store.
It is likely your interest rate will increase if you have missed payments and this may be on top of late payment fees. You can save a lot of money simply by understanding how your card works and all the factors that affect your rewards and interest rate.
4. Protect your credit card information.
Security is a hot-button topic for those who use their credit card to make online purchases, especially as we socially distance and do more shopping from home. Our credit card team here at Elevations Credit Union recommends:
- Setting up mobile wallets so you don’t have to handle cards in person. This also reduces exposure to credit card skimmers.
- Never giving out credit card details over the phone to someone who claims to be calling from your financial institution. Instead, contact the number on your card to follow up with any questions or concerns mentioned by the caller.
- Reviewing your credit card statement each month. If you see charges you don’t recognize, investigate them and contact your card provider for assistance.
- Setting up Card Alerts* to monitor transactions and even enable or disable your card quickly and easily from your phone or computer.
5. Build your credit profile using a credit card.
For college students and young professionals, using a credit card responsibly by making payments on time and keeping balances manageable helps build a solid credit history.
Later, when lenders are evaluating your need for a large loan like a car loan or mortgage for your first home, credit reporting bureaus will share your financial history as a credit card holder.
Our financial spending habits, income and needs are constantly evolving and changing. Credit cards may be able to help you manage your finances and improve your financial health for future purchases. If you’re interested in debt consolidation to make your monthly credit card payments more streamlined, read this post for a few options to get started.
Have more questions about credit cards? Our team would love to help answer them. Contact us today by phone or online chat from the comfort of your home.
*This link leads to a third-party website.