Credit Cards -the Good, the Bad, and the Truth

When it comes to credit cards, everyone has them. Right?  You need them.  How else can you book a flight, get a hotel room, or rent a car?  They help you establish credit, and you can earn money by using them.  They are fine!  

Well, yes and no!

Credit cards can be okay when used correctly and managed properly.  However, most people do not do that, so they are not fine or good!  Credit cards are one of the easiest ways to get into a financial situation that spirals out of control really fast. 

According to the latest statistics from the Federal Reserve Bank of New York for the fourth quarter of 2021, the total credit card balance in America was $856 billion. That figure is an increase of $52 billion from the third quarter of 2021. Moreover, according to LendingTree, the national average of credit card debt, including both retail credit cards and bank credit cards, was $6,569.00.  While that is not an exorbitant amount, couple that with all of your other bills as well as student loans, and the amount becomes increasingly unmanageable. 

So let’s take a look at the types of credit cards and the practicality of actually having one.  First, I am not talking about retail credit cards that you get at every place where you shop.  Don’t get those!  They are a trap.  They lure you into opening one, saying you will save a certain amount on your first purchase, etc. Before you know it, you have five or six or ten different credit cards from all of these places, now with various amounts on them.  This is going to do nothing but lower your credit score and cause you to pay more in the long run for that pair of pants than if you had paid cash.  If you don’t carry cash, which I get since I don’t either, use your debit card.  Then you know it is paid for and there will not be an additional cost when you forget to pay that credit card bill, or, worse, you don’t have the money to pay the credit card bill. What I am talking about is bank credit cards. 

Annual Fees: Most bank credit cards do not have an annual fee.  Some, such as the Blue Cash Preferred Card from American Express, the Capital One Venture Rewards Credit Card, and the Chase Sapphire Preferred Card, do, so you will want to make sure you know if the one you are applying for has an annual fee or not.  The Blue Cash Preferred Card from American Express actually does not have a fee the first year, but after the first year, there is a $95.00 annual fee. I do not use a card that has an annual fee. My wife and I have the Chase Freedom card. I typically recommend this card if you are looking for a card with no fees. Feel free to check out the Chase Freedom card here, to see if it fits your needs.

Interest Rates:  Be mindful of the interest rate that your bank credit card has on the balance of the amount charged.  Some credit cards have incredibly high interest rates.  In fact, according to LendingTree which obtains its information from the Federal Reserve, for the first quarter in 2022, the average APR was 14.56%, for interest accruing credit cards the average was 16.17%, and it was 19.68% for new credit card offers. Exactly what does this mean?  Information from Forbes shows a great example.  If you had a $7,500 balance on your credit card, paying $150.00 per month, at an APR of 15% compared to 20%, the difference is striking.  To make this easier, look at the chart below from Forbes:

Credit Card BalanceMonthly PaymentInterest Rate (APR) Months to Pay Off the DebtTotal Amount of Interest Paid

Wow!  Try adding that to your debt!  No thanks!  This is the Bad part of credit cards.  Too quickly you are snowed under with credit card debt IF you do not manage credit cards correctly.  

Types of Credit Cards:  There are many different types of credit cards you can get if you decide you need to have a credit card.  I would suggest that if you are going to get a credit card, you think about your buying habits in order to best utilize what the credit card has to offer.  For example, if you are hoping to rack up reward points for hotels or airlines, you want to do your research and find those best suited for you.  Some people want rewards for everyday spending such as groceries or gas.  Those credit cards are also available.  So whether you want a dining rewards credit card or a cash back rewards credit card, there are credit cards to fit your need.    Just be deliberate in your choice.  Ultimately, to make the credit card work for you, you want to make sure you do NOT carry a balance.  As long as you build your spending into your budget, stay within your budget, and pay the balance off each month, credit cards can be good to have.  If you are not that disciplined, I would recommend a debit card instead.  

Interest Rates and Credit Scores:  The last thing to keep in mind is that often you will get a better credit card interest rate IF you have a good credit score. Not paying the balance in a timely manner and being late on paying your bills will wreck your credit score. The higher your credit score, ultimately, the lower the interest rate in general.  According to The Consumer Credit Card Market Report, as of September 2021, The Bureau of Consumer Financial Protection noted that for people with credit scores of 740 and above, called Superprime, the average credit card interest rates were 16% to 18%.  However, for those with credit scores of 579 or below, called Deep Subprime, the average credit card interest rates were 24% and above.  There are varying degrees between Superprime and Deep Subprime, but they were all in the 20s.  Obviously, cleaning up and/or maintaining a good credit score is key.  I will address ways to help do this in a future blog.  

The Truth: The good and the bad about credit cards as noted above is obvious.  Like I always recommend, having a budget and sticking to it is key to your financial success.  Not getting into debt is fundamental.  Credit cards can be beneficial if you utilize them effectively.  I don’t recommend getting more than one, nor do I advocate getting retail credit cards.  If you are going to get a credit card, make sure you research the best card for your spending and desired rewards and that you always carry a zero balance, so the card works for you.  As always, I am here to help you on your financial road to success.  Contact me for help getting out of debt, making credit card decision choices, or setting up your budget. 

Published by Budgetdog

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