Have you ever thought…Oh if I charge it then I have an extra 30 days to pay it off? You are not alone and this is something the credit card companies love! You see two major revenue sources for credit card companies is charging the merchant each time they process a transaction and charging you!
How credit cards work
Bankrate.com describes that “credit cards offer you a line of credit – an agreed amount that you can borrow, with almost no caveats. Unlike loans which require you to take a fixed amount of money, and make regular monthly repayments on the debt, credit cardholders are under no obligation to use their credit; if you don’t use your credit card, there is simply nothing to repay at the end of the month. If you do choose to use your credit, you are required to make a payment. However, so long as the amount you pay meets or exceeds the minimum monthly payment, you are free to roll the balance on to the next month, by which time you may have used your card again.” This ability to roll your debt over month to month is convenient – and extremely dangerous.
Now to be fair, there are benefits to credit cards. They offer interest free credit (for a short period), purchase protection, security, expands your ability to pay bills and attain necessities etc. It is vital to balance these benefits with the potential pitfalls inherent to relying on credit card usage.
According to a January 2019 article on wallethub.com the average credit card interest rate on new offers is 19.24% (yes 19.24%!). This is up 5.1% from the average existing credit card account. That is significant (and kind of crazy)! As interest rates increase, the interest rate on credit cards will rise. So each time you hear that the Federal Reserve raised rates, it impacts the rates on credit cards. In the 12 month period ending December 2018 the Federal Reserve raised interest rates five times and is expected to raise them more in 2019. This means interest rates are only going to go up! With the average American carrying a balance of $6,375 according to CNBC, we are talking about a substantial cash outlay just paying interest charges.
CNBC reported in 2018 that 61% of Americans do not have enough cash savings to cover a $1,000 emergency, with CNN reporting that more than a third of households have a major unplanned expense, with half of those costing at least $2,500. This is part of what is perpetuating the credit card crisis.
So what can I do?
The first thing to do is get educated! Know what cards you have, understand how they work, why you have them, and then prioritize how to reduce the number you carry (and the debt associated with them). In a December 2018 article, Credit Karma said their average member carried nearly 5 credit cards and it would be higher if they excluded those without a credit card at all. They will have different balances, interest rates, and due dates. Sometimes if you threaten to leave they will reduce your rate automatically. But you still need to do more.
Create a plan to eliminate this debt. In this instance. the old adage rings true that if you fail to plan, you plan to fail. Many Americans do not believe they will ever fully pay off their credit card debt – you do not have to be one of them. There are many proven strategies on getting out of debt. Speak with a professional. The couple hundred bucks you spend can save you thousands.
In conclusion, it is important to remember that while credit cards “make life easier”, it is also easy to lose track of your spending. Like most tools, if used correctly a credit card can help you. It can facilitate an easier way to make your purchases, enable you to travel in ways you would not have been able to otherwise through their rewards programs, has security and protections, and more. However, how often have you been shocked when you open your credit card statement thinking “there is no way I spent THAT much” only to review the charges and think of yeah I bought that, and that, and that.
Hirsch Serman, MBA, CPA is the founder of Lifecycle Financial, a company that helps those going through Divorce and other life cycle changes to navigate the financial pitfalls of a new life dynamic. The company was founded through personal experiences in divorce and watching the changes in an aging parent. He has worked in finance for over 20 years (including financial planning and tax) and has taught on the university level as well as conducted seminars for high school youth on personal finances. Hirsch is a member of the American Association of Daily Money Managers (AADMM).
INC., The Memphis Business Journal, The New Southern, and Funding Sage media outlets have all covered his work in Divorce and Hirsch was selected to be a New Orleans Entrepreneur Week Fellow. Hirsch has a passion to serve others and has worked with numerous non-profit boards including the United Way and is a trustee of Texas College.