By Mrs. Shay Cook, CEO & Founder of Crusaders for Change, LLC (C4C) Accredited Financial Counselor® & Financial Fitness Coach®
October is Financial Planning Month, and understanding credit cards is a crucial component of financial wellness. As the holiday season approaches, it's more important than ever to manage your finances responsibly and avoid falling into debt. Credit cards can be a powerful financial tool when used responsibly, but they can also lead to debt if not managed wisely.
More and more people use credit cards instead of cash or checks. The Federal Reserve Bank of San Francisco's 2022 study revealed a significant surge in credit card usage. In that year, credit cards accounted for 31% of all payments, marking the highest level since the study began in 2016. This trend indicates that credit cards are becoming increasingly popular and convenient for consumers compared to cash or other payment methods.
According to a recent Forbes Advisor survey from December 2023, less than 10% of Americans rely solely on cash for their purchases. Instead, debit and credit cards reign supreme, with 53% of consumers using a physical or virtual debit card and 37% opting for a physical or virtual credit card.
But just because more people are using credit cards doesn’t mean they are using them wisely. The Federal Reserve Bank of New York's latest consumer debt data paints a concerning picture of credit card debt in the United States. As of the second quarter of 2024, Americans' total credit card balance reached a staggering $1.142 trillion, surpassing the previous high of $1.115 trillion set in the first quarter of the same year. This alarming trend highlights the growing reliance on credit cards and the potential for financial strain among consumers.
What is a Credit Score?
Your credit score is your overall grade and your report shows why you got that grade.
Lenders use your credit score to decide if you're a good risk. If your score is high, they're more likely to give you a loan and offer you a good interest rate. But if your score is low, it might be harder to get a loan, or you might have to pay a higher interest rate.
Here's what makes up your credit score:
Payment history: Do you pay your bills on time? This is the most important factor.
Debt levels: How much do you owe compared to how much credit you have?
Length of credit history: How long have you had credit accounts?
Types of credit: Do you have a mix of different types of credit, like credit cards and loans?
New credit: Have you applied for a lot of new credit recently?
A good credit score can help you get better deals on things like loans, credit cards, and even insurance. So, it's important to take care of your credit!
What is a Credit Report?
Think of your credit report as a financial report card. It's a record of how you've handled money in the past, like how well you pay your bills. Lenders use it to decide if you're a good borrower. A good credit report can help you get loans, rent an apartment, or even get a job.
What is a Credit Utilization Ratio?
The percentage of your available credit that is currently in use. A high credit utilization ratio can negatively impact your credit score. Imagine your credit utilization ratio as a pie chart. The pie represents your total credit limit, and the slice you use is the part you've spent.
A big slice means you're using a lot of your credit. Lenders don't like to see a big slice, because it means you might be borrowing too much.
Aim for a small slice. A good credit utilization ratio is usually around 30% or less. This shows lenders you're responsible with your money.
How do I know if I am choosing the right credit card?
As a beginner, selecting the right credit card can be overwhelming. Here are some factors to consider when choosing a card:
Your credit history: If you have limited or no credit history, you may need to start with a secured credit card, which requires a security deposit.
Your financial goals: Consider your spending habits and what you hope to achieve with your credit card. Are you looking for rewards, cash back, or a low interest rate?
Annual fees: Some credit cards charge an annual fee, while others do not. Weigh the benefits of the card against the cost of the annual fee.
Interest rates: Compare interest rates among different cards to find the most favorable terms.
Additional features: Consider any additional features that may be beneficial to you, such as purchase protection, travel insurance, or rental car insurance.
Here are a few places to compare credit cards for beginners:
Bankrate.com - Bankrate is a financial publisher and comparison service that provides tools and resources to help people make smart financial decisions. Bankrate offers a variety of resources, including comparison tools and financial calculators.
NerdWallet.com - NerdWallet is a personal finance company that offers a free app and website to help people make smart financial decisions, including budget tracking and recommendations for financial products.
Remember, responsible credit card use is essential for building a strong financial foundation. By choosing the right card and using it wisely, you can establish a positive credit history and unlock the benefits of credit.
How to use your credit card responsibly
Using credit cards responsibly can help you build a strong financial foundation and avoid debt. Here are some key tips to keep in mind:
Pay your balance in full each month: This is the most important rule for responsible credit card use. By paying off your balance in full, you avoid accruing interest and can save money over time.
Monitor your credit card activity: Regularly review your statements for any unauthorized charges or suspicious activity. Report any discrepancies to your card issuer immediately.
Limit your credit card spending: Only charge what you can afford to pay off each month. Avoid carrying a balance from month to month, as this can lead to high-interest charges and debt accumulation.
Choose the right credit card for your needs: There are many different types of credit cards available, each with its own benefits and drawbacks. Select a card that aligns with your financial goals and spending habits.
Avoid using your credit card for cash advances: Cash advances typically come with higher interest rates and fees, making it difficult to pay off the debt.
Protect your card information: Never share your card number, PIN, or security code with anyone unless you are making a purchase. Be cautious of phishing scams and other fraudulent activities.
Consider using a credit card for rewards: Many credit cards offer rewards programs, such as cashback, points, or miles. However, make sure the rewards outweigh the potential costs of carrying a balance.
What to do if you are carrying credit card debt
If you find yourself in debt, here are some strategies to help you get back on track:
Create a Budget: Develop a detailed budget to track your income and expenses and identify areas where you can cut back.
Prioritize Debt Repayment: Determine which debts to focus on first, such as those with the highest interest rates or the smallest balances.
Consider Debt Consolidation: Combining multiple debts into a single loan may offer a lower interest rate and simplified repayment.
Seek Professional Help: If you're struggling to manage your debt, consider financial counseling.
Are you struggling with credit card debt and ready to take control of your financial future? Crusaders for Change is here to help. Our expert financial counselors can provide you with personalized guidance and support to develop a debt management plan that works for you.
Don't let credit card debt hold you back any longer. Schedule a free clarity call today and discover how Crusaders for Change can help you achieve financial freedom. It's a small investment of time with a big payoff.
What are the benefits of responsible credit card use?
When used responsibly, credit cards can offer several advantages:
Build Credit: Responsible credit card use can help you establish and improve your credit score.
Earn Rewards: Many credit cards offer rewards programs, such as cashback, points, or miles.
Purchase Protection: Some credit cards offer purchase protection coverage in case your purchases are lost or damaged.
Emergency Funding: Credit cards can provide a safety net in case of unexpected expenses.
Remember, credit cards are a tool that can be used for your benefit or detriment. By understanding the basics and practicing responsible credit card use, you can navigate the plastic jungle with confidence and achieve your financial goals.
Crusaders for Change (C4C) is here to help you take control of your finances. C4C offers personal financial counseling and coaching to liberate individuals and couples from the stress that comes with personal debt.
We know the thoughts that cycle around your mind day in and day out are a heavy burden to bear:
“I would be happy if I could just pay off some of these credit cards."
“I wish I could enjoy time with my kids instead of worrying about making ends meet.”
“How can we make do when we’ve got this unexpected hospital bill to pay?”
“It’s been forever since I’ve had a vacation, but I just can’t afford it.”
“How can we buy the home we need, when we can’t pay for the one we’re in?”
We help our clients untangle their personal finances and support them on their journey toward financial freedom. Contact us today to schedule a free consultation.
Comments