How many of you have credit cards? Even worse, how many of you rely on credit cards? Don’t feel bad if you do. Just don’t carry balances on them. But if you carry a balance, you HAVE to stop. “But my card pays me rewards.” That doesn’t matter if you are not paying your balance off every month.
How are they holding you back you ask? Let’s see…
High Interest Rates
According to WalletHub, as of January 2019, the average credit card interest rate is 19.24% for new offers and 14.14% for existing accounts. That means for every dollar you carry on the balance you are paying about .19 cents and .14 cents respectively. Maybe that doesn’t sound too bad with these low numbers, but if you carry $100 on that credit card each month, without paying it off, you will be paying $19 and $14 respectively. This really starts to add up.
The more credit you are using, the less you have available. I know that is a no-brainer but I am saying it anyway. Why do you need credit you ask? You need credit for those big purchases. And you will want a good interest rate for those big purchases. If the interest rate is too high, it may be because you are “Over extended.” Simply put, you have borrowed more money in credit than you are able to pay back. This will strap you big time and result in high interest rates.
No Credit Can Be A Big Problem
When you don’t have any credit and you don’t have any cash, you are pretty much paralyzed. You can’t make any larger purchases. You can’t buy a house without credit. You can’t buy a car without credit. Now, if you have the cash, that is great, but few people have the cash to buy a house and a car so easily. At least not nice houses or reliable cars.
Most people do not have an Emergency Fund and tend to use their credit cards for emergencies. I was guilty of this a few years back. I had no money saved for emergencies because I was constantly trying to pay down my credit cards, only affording the minimal payment. And guess what happened? Other “emergencies” came up, which meant more money went on the cards. It’s a vicious cycle.
Mountain Of Debt
This vicious cycle of only paying the minimum payment, carrying over a balance, and dealing with more “emergencies” will often result in a mountain of debt. It’s just horrible. Some people will put purchases on their cards, pay the minimum payment, carry a balance, and then put more purchases on their credit card. It doesn’t take long for debt to build, especially given the interest rates I mentioned above. Before you know it, you are trapped under a mountain of debt and seemingly no way out. “But wait. I can transfer my balances.”
Transferring The Balances
Oh yeah. I am familiar with the transfer game. I was very good at it. Every 12-18 months I would transfer balances from high interest rates cards to introductory 0% rates for balance transfers. This is awesome…but is it really? You typically have to pay a 3% transfer fee. For example, transferring $20,000 would cost you $600 in transfer fees. Congratulations, you just picked up $600 more in debt. Maybe you can do this once, maybe even twice, but if you do this multiple times with multiple cards, I reckon you are not reducing your debt. And if you are, it isn’t by much.
Cut All Cards, But Keep One!!!
I strongly recommend that you cut all your credit cards and pay them off. It will take time, and it will take some restraint, but do it now. In order to make this easier, try to establish an Emergency Fund with at least $1000 in it. This will cover you in case a real emergency comes up. Once you have that $1000 in the Emergency Fund, cut all your credit cards…but you should keep one. What card should you keep? I call that one card the Cash Card!!!
I have one credit card that I use for all my purchases. It is a replacement for my debit card. This card offers cash rewards based on my purchases. There are many cards out there that will offer you cash rewards. You just have to find the one that fits your lifestyle best. This Cash Card should never carry a balance. You MUST pay this off every month. If you can only afford a $500 payment a month on this card, then you better not put more than $500 on it. Your goal is to have the credit card company pay you to use their card, not the other way around. You may be thinking, “What’s the big deal? A little bit of cash rewards won’t really make a difference.” I can tell you, based on personal experience, it makes a big difference. First of all, you are not paying to use their credit card, since you are paying the card off every month. Secondly, the money you get back from it can be used many ways. You can save it, invest it, or use it to buy something you really want. I can tell you that I used my cash rewards for many years to convince Santa to give my family a better Christmas. 😉
This post is not meant to be an end all be all to your credit card concerns. The points here are just some high level things that tend to bite a lot of people in the butt. The take aways from this are simple though:
- Don’t carry balances on your credit card(s).
- Establish your Emergency Fund.
- Only own one credit card. The Cash Card!!!
- Use your Cash Card for purchases.
- Pay off your Cash Card every month.
Keep your credit safe and don’t be trapped under a mountain of debt.
Make the credit card companies pay you rather than you paying them!!!