There has been so much said about credit lately, I was wondering if there was more to learn about credit than simply suggesting we don't know what the heck we are doing. There is a widely publicized number about credit, and I suppose this might be the best place to start. How many of you have heard a number for the average the debt for credit cards as being around $8,000?
Let's take a look at that $8,000 number. First off, credit cards are issued to people not households. It's a huge detail if you consider that even though there might be more than one person allowed on the account, everyone signs his or her own name. And most of the adults in those households, which could be as many as three or more, have cards.
On a per person basis, the number is closer to $2,000 as an average. But even this is skewed because of the number of people who carry out-sized balances - and the wealthy do this more often than the average user - making even that number a little suspect.
And secondly, it isn't the card that gets us into the trouble; rather it is you, the user who causes all the damage.
There is no denying that credit card users spend more when they use plastic instead of cash. But it is those balances, the one you can't manage, the one that has negatively affected the saving rate at least until recently, that no one knows about. Only the credit card companies do and they aren't necessarily going to tell you if there is a problem. So know one really knows what the individual account holder actually carries in the way of credit card debt. The statistics are almost impossible to find.
What I could find suggests that about 75% of the households have cards but less than 50% carry any balance. I'm guessing that there are probably a great many of use who could use a lesson on why these little pieces of plastic, in the right hands, with the right attitude, can actually save you money.
Credit cards aren't for everyone. In truth, there is no single financial product that will work the same way with everyone. But in the hands of someone with a little smarts, and that we all have, a credit card can help and teach you about money Ð and more than just management of it Ð but the cold hard realities we so often run from.
The most common wisdom about credit cards would be to pay off the balance at the end of every month. The question is: would that be a good idea?
Yes and no. Teaching yourself to not spend more than you have would certainly be far better than spending more than you have. But we should also keep in mind, even thought the credit card company isn't telling most of us whether we are doing good or bad with credit, they a gathering a trove of information about how you use cards. If you were a business and you knew that people who use plastic, even for something as simple as fast food, actually increase the size of their order once they decide to pay with plastic, you'd make the service readily available. Not only are businesses curious about how you use the cards, so are the credit agencies.
And there is no faster way to getting your credit back in sync than using them they way they want you to use them.
Credit cards can be amazing tools if you are focused on rebuilding your credit or looking to buy a house or even car insurance. Used the right way, you can increase your credit score and a higher score is key to lower interest rates which you will get when the credit agencies rate you for your use of plastic. The best way is carry an occasional small balance of about a hundred dollars, paying the whole bill off in full periodically. Yes you will pay some interest for a short time. But you can look at it as tuition into a degree in good credit management.
Credit Card issuers often sweeten the pot with rewards (which can be an incentive to overspend, but if the rules aren't too complicated and the reward is something you might actually use and you don't overspend, a freebie is a freebie). Or they might have some other travel benefit, like hotel rooms, car rentals or plane tickets. Some have price protections (with refunds if the same item is on sale for less after you buy it), insurance (such as damage within a certain time) and some may actually extend the warranty of the product.
I can't imagine traveling without a card. A lot of them offer all sorts of insurances and reimbursements.
You do have to be very careful. Carrying a balance can create all sorts of havoc if you do it too often. You should always log your usage and yes, there are a number of apps for this that go beyond the check ledger. Mint makes a good free one and an app called Loan Shark gives you the true value of the product after you let the balance sit on your credit card until it is paid off. Your bank might even have an app. That $8,000 debt number we mentioned earlier at 15% would take 30 years to pay off paying only the minimum.
And you always have to keep this in mind: this is not a game. You can't avoid the reality that you have to get some financial discipline. Saving isn't enough, even though cash is the great financial rationalizer. After all, you can't spend what you don't have. But growing up has a lot of components to it and this is the quickest way to learn how to use your money smartly. Shop for cheap rates, no annual fee and a card that suits you.
Here is the link to AnnualCreditReport.com or you can call 877-532-8778.
