3 Things You Should Know About… CREDIT CARDS

Taking the Fear out of Finance with Laura Redfern, CFP®:

I recently had a client tell me that the best financial advice she had ever received was to NEVER get into credit card debt.  Sure, we all know that carrying credit card debt isn’t smart.  Or fun.  Or glamorous.  In the book “On My Own Two Feet: A Modern Girl’s Guide to Personal Finance,” the authors claim that credit card debt “can be as addictive and debilitating as getting hooked on drugs.”  Yikes!

Yet anyone who has ever tried to make a major purchase without a credit history has experienced the catch-22 of never having carried a credit card.  The key is not to avoid the card, but to avoid the debt.  So how do we use credit wisely?

Here are 3 things you should know about credit cards:

1.  As of September 2013, the average American household carries $15,185 in credit card debt.  This is according to the gurus at Nerdwallet.com, who extrapolated multiple data sources to determine this number: http://www.nerdwallet.com/blog/credit-card-data/average-credit-card-debt-household/

At an APR of 20%, making only the minimum payment, this will take a whopping 77 years to pay off!  During that time, a total of $72,093 in interest will be paid to the credit card company.  By making an additional payment of $294/month, the balance could be paid off in 10 years, saving $52,062 in interest.

The Smart Choice Is…

Pay off your credit card balance in full each month.  If you need to, commit to a “debt snowball” plan to get out from under a large credit card balance.

2.  Credit Card Perks may not be so perk-y.  Since you often have to pay an annual fee to get perks like cash back or frequent flier miles, you’ll want to do the math and make sure the perks are worth it.  Here’s an example: paying a $60 annual fee for a card that offers 1.5% cash back is only worth it if you charge more than $4000/year ($60 divided by 1.5%), or $325/month.  (And pay it off, of course!)

The Smart Choice Is…

Do the math on Credit Card Perks to know if you’re really getting a good deal.

3.  Check your credit report. Every year.  When you are applying for a loan to make a major purchase is not the time to discover there are inconsistencies in your credit report.  Doing your homework and taking a moment to do this task each year can potentially pay off not only in dollars, but also in major headaches.

The Smart Choice Is…

Make it a habit and schedule on a day that’s easy to remember, like your birthday or anniversary, so it doesn’t get stuck on the bottom of the “To Do” list.

Make the commitment now to choose healthy credit behavior.  Just like thinking about going to the gym won’t actually make you physically fit, learning about maintaining good credit behavior won’t do much good until you go out and practice!

Additional Resource:

If you’d like to learn more, check out: http://www.federalreserve.gov/creditcard/ maintained by Federal Reserve Board.  The site contains helpful information like how to decipher a credit card offer, where to go if you have a billing error or a complaint, and a repayment calculator.  There are also updates on new credit card rules (the last set of rules went into effect in 2010), credit protection laws, improving your credit score, and even avoiding scams.