Credit Cards: The Good, The Sad, and The Costly
Even before the pandemic, millions of Americans were drowning in card debt. But if they just did five simple things, they could be swimming in savings. That’s what we’ll show you today.
Who we are and why it matters
My name is Doris Baker, and I work with Consolidated Credit, one of the nation’s oldest and largest nonprofit credit counseling agencies. In nearly three decades, Consolidated Credit has helped over 10 million people find relief from credit card debt. This is a topic we know well and deal with every workday.
Credit card debt in U.S. hits all-time high of $930 billion
Sadly, we’re very busy here at Consolidated Credit. We’d love to no longer be needed. But with nearly a trillion dollars in credit card debt in this country, that’s not going to happen anytime soon. Of course, once you start talking about hundreds of billions of dollars, it’s hard to relate.
On average, Americans carry $6,194 in credit card debt, according to the 2019 Experian Consumer Credit Review. While that goes up and down over the months and years, it never goes away. One big reason has nothing to do with running up your credit cards. It has to do with interest rates.
When you carry a balance, you pay for the privilege. Different cards charge different interest rates, and those fluctuate over the course of a year. But right now, you can pay up to 18 percent on your balance. That’s almost one dollar for every five dollars you charge. And you’ll pay that every month!
The right credit card of your lifestyle
So that leads us right into our first big topic today: How to choose the right credit card for your lifestyle. It might sound like a weird concept, since all credit cards basically do the same thing, and they all look alike when you hold them in your hand. But those small pieces of plastic with rounded corners are all very different when you look at the details.
Retail store credit cards
Now, there’s no way we’ll be able to dive deep into this topic and name the best card for you. Our goal is to show you just how many categories of credit cards exist. From there, you can easily find more information. But we also want to warn you about some of these categories. And we’ll start with retail store cards. These are almost uniformly terrible. We’re talking about cards that are branded not as a general credit card, but as coming from just one store.
Whether it’s Williams-Sonoma, Lane Bryant, or Goodyear, store cards are among the worst – and that’s according to CreditCards.com, which rates these things. Why do they stink? Well, they charge a lot more than the average interest rates, so if you can’t pay off the balance each month, you’ll be paying a lot more. And of course, the rewards they offer are only good at that retailer. Finally, store cards have some of the longest and densest fine print, which makes it hard to figure out if you’re getting a good deal – and easy to get caught paying extra fees.
Retail store credit cards have only a few advantages, and it’s all about the math. Do you shop there often for basic items you definitely need? Then, say, a card dedicated to a grocery store might be worth it. Is there a great initial sign-up bonus. That works if you’re fixing up your house, and the hardware store card will give you a deep discount on the $2,000 you’re spending for the initial purchase. Finally, if you can be diligent about always paying off the monthly balance, you might actually profit from one of these cards.
Rewards cards
Now we get to the funnest part of credit cards. The rewards Everyone loves to talk about rewards, whether it’s points, cash back, airline miles. These days, almost every card comes with some kind of reward system. The problem is, few people look at the other side of the equation. Namely, the better the rewards, the more the card will cost you. Which means you need to be more careful to really profit from owning one of these cards.
Besides higher interest rates on rewards cards than other cards, and one study showed that nearly 9 in 10 airline cards came with annual fees – something very few other cards have these days. Other studies show that the higher the rewards, the steeper the fees, including late fees. So if you want to really rack up the rewards, keep one eye on your payment deadlines, and remember this: If you carry a balance, you’re handing your rewards to your credit card company.
Introductory offers of 6-18 months
These cards offer only one big perk, which doesn’t sound sexy but it really is: You get an introductory offer of a really low interest rate – or even none at all. That’s right, you might be charged nothing on your balances for up to 18 months, although some cards offer as little as three months. What’s so great about these cards? Well, if you need to make a big purchase and can pay off the balance within the offer period, it’s like someone loaned you free money for several months. But like everything else, there’s a catch. We’ll address that next.
Balance-transfer cards
A balance-transfer card is a special type of low-interest card. It offers the same introductory rates on low or no interest, but it has another powerful perk. It lets you gather up your balances on your other, higher-interest cards and move them over to one card with a lower rate.
You’ll pay a fee for the privilege, usually 3 to 5 percent of the amount you transfer. For example, if you transfer $5,000 to a card with a 3-percent fee, that’ll cost you $150. Most transfers need to be completed within 60 days from account opening. So factor that in. Also, like any low-interest or zero-interest cards, rates go up after a while. That can be a few months or a year and a half. But once that introductory rate ends, the new rate might be higher than the one you just left.
Deciphering your credit card code
When most people get their credit card statement, they usually don’t look any further than how much they owe. But the rest of it contains vital information that could save you money. How? Because your statement will tell you if you’re really getting the best deal on your card. Sure, the sales pitch touts all sorts of perks, but the statement gives you some crucial numbers you can easily compare to other cards, so you can score the best deal.
When most people get their credit card statement, they usually don’t look any further than how much they owe. But the rest of it contains vital information that could save you money. How? Because your statement will tell you if you’re really getting the best deal on your card. Sure, the sales pitch touts all sorts of perks, but the statement gives you some crucial numbers you can easily compare to other cards, so you can score the best deal.
Most important statement numbers
The most important number on your statement is your current annual percentage rate. APR is what you pay for the privilege of being able to charge on your card, and the higher this number, the more you’re paying just to service your debt.
The most devious number on your statement is Minimum Payment Due. This is the least you can pay without being hit with a late fee. But don’t fall for this. Your credit card company would love you to pay the minimum, because that means you’ll rack up even more interest charges.
Say you have a $2,000 credit balance with an 18 percent annual rate, and the minimum payment is $10. It would take you 30 years to pay it all off.
Finally, the easiest number on your statement is the Payment Due Date. But we mention it here for one very important reason: You can often get that changed just for the asking. If moving it a few days later will help you meet your bills, maybe because it aligns better with your paychecks coming in, your credit card issuer will sometimes help you out.
Can you get a credit card even if you have terrible credit?
Here’s a conundrum: If you have bad credit, you can’t get a credit card. But to get good credit, one of the best ways is responsibility using a credit card. So what can you do? Fortunately, there’s a special credit card designed specifically for people with bad credit. It’s called a secured credit card, and it can help you rebuild your credit so you can then acquire a standard credit card. But of course, like everything else we’ve discussed today, there are pros and cons. Let’s go over those now.
How a secured credit card works
A secured credit card is different from a normal one because you have to make a refundable deposit. The value of your deposit determines your credit limit. So it’s not really a “credit card” at all. It’s more like a debit card, but it gets reported like a credit card. For example, if you put down a $500 deposit, you’ll have a credit limit of $500. Then you can use your credit to buy things you need, and pay that amount off in full every month. On average, it takes six months for secured credit cards to start improving your credit, according to credit.com. When you decide to give up your secured card, and as long as you’ve paid any balance, you will receive your deposit back when you close the secured credit card account.
The downside of secured credit cards
A secure credit card typically has a higher interest rate than many non-secured cards. You can get around that, however, by paying off your statement balance each month so you don’t pay any interest. Unfortunately, some secured cards are loaded with fees and other unfavorable terms – including annual fees. And if you fail to make a payment, the issuer can take your deposit. So you definitely don’t want to be careless with deadlines and payments.
What happens if you’re drowning in credit card debt?
All of this advice might sound good if you have manageable credit card balances, or even none. But what if you’re buried under credit card debt, and you’re maxed out on your credit limits? If it gets that bad, you’ll need professional help.
Thankfully, there are nonprofit credit counseling agencies that can help you. Consolidated Credit is one of the largest and oldest. When you call us, a certified credit counselor gives you a free debt analysis. It comes with no obligation, and by law, any recommendations must be the best for your situation.
What is a debt management program?
One of the most powerful debt-busting solutions is only available through a credit counseling agency. It’s called a Debt Management Program, or a DMP for short. It might be able to cut your monthly payments by up to 30 or even 50 percent. A DMP also freezes late fees. Even better, you only make one payment a month for all the credit cards that are in the program. And unlike the other debt solutions like bankruptcy, your credit score isn’t irreparably damaged. It might dip temporarily, but it actually improves over time. Unfortunately, credit card companies won’t let you sign up for a DMP yourself.
To qualify for a DMP, you have to work through an agency like Consolidated Credit, because the credit card companies trust those nonprofits to follow all the rules they establish. After all, the credit card companies are willing to forgo some of what you owe them to get back the rest. They don’t surrender profits that easily. Luckily, when you work with a reputable credit counseling agency, they take care of the paperwork for you. So in a way, this con becomes a pro.
DMPs aren’t for impatient people. It often takes years to graduate into financial freedom. One reason for the long timeline is that DMPs are supposed to be relatively painless. Imagine a crash diet compared to gradual lifestyle changes that help you lose weight. That’s how a DMP helps you shed debt. And your credit counselor is there for you the entire way. But if you’re looking for a quick fix, this isn’t it. But it’s often the best and most permanent solution.
Thank you!
So that’s it. And we’ve just scratched the surface. Credit cards are as complicated as they are widespread. There are 253 million adults in this country, and 191 million of them have credit cards. Yet not many know everything about those pieces of plastic they use so often. If you have any questions about what we’ve discussed today, Consolidated Credit can get you the answer.
