By the end of 2023, over half of Americans had credit card debt, on average, worth $6,360 (TransUnion). Today, more and more people are using credit cards and they are one of the most common ways people pay for things in America because they are convenient and work nearly everywhere! They also come with lots of benefits like airlines miles, cash back options, points that can be redeemed for a variety of rewards, and other perks. Credit card companies also have helpful websites and apps that can provide an estimated credit score, social security number alerts, and identity theft protection. Finally, they offer greater protection from fraudulent charges. Getting a debit card stolen with the pin can be problematic. Someone can spend money directly from your bank account generally without protection from your bank, but with a credit card, all charges are spent using the financial institution’s money. As long as the card owner reports the charges as fraudulent within at least sixty days, they are only liable for up to $50 of the charges. All the benefits of credit cards make them a great option for consumers to use today compared to debit cards or cash.
All of these great benefits draw people in to getting and using a credit card, but many people do not know how to use it effectively. Nearly everyone has a credit card nowadays, but not nearly as many people know how to use it well. With over half of all Americans having credit card debt, it has become evident that many Americans are unaware of and fall into the common pitfalls involved in using a credit card which are: missing payments, carrying a balance, and over-utilization.
Common Pitfalls of Credit Card Use
- Missing payments
Every time you use your credit card, it adds to your total bill. It’s a good practice to pay off your total bill each month, but in the case of an emergency, it is best to at least pay off the minimum. A missed payment can be harmful to your credit score and report for a long time. Any missed payment will stay on your credit report for seven years, and while over time it will have less of an effect, it still has negative effects. Your payment history is the largest determining factor for your credit score and having any missing payments on your history is going to hurt your score. It’s also important to note that the longer it takes to make the late payment, the more detrimental to your credit score it will be. There is a way you can avoid hurting your credit score even if you miss the payment though. If within 29 days or less the card owner makes the minimum payment, there will not be a missed payment on the credit report. The owner will still be charged with a late fee, but the credit score and report will not be affected. Long story short, pay off the total credit card bill or at least make the minimum payment.
- Carrying a balance
Credit cards have some of, if not the highest, interest rates of any kind of loan. Since 2003, average credit card interest rates have more than doubled. As mentioned earlier, most Americans carry a balance on their credit card, and on average, it is to the tune of $6,360. The average interest rate for a credit card is 24.92% according to Lending Tree, and that means it would take nearly four and a half years to pay off the balance. It would also end up costing well over $4,000 in interest to borrow around $6,000! Carrying a balance on a credit card leaves consumers being charged avoidable interest which is a waste of their money. Given that credit cards have some of the highest interest rates, it is always best to not carry a balance and if already carrying a balance, to prioritize paying it off as soon as possible.
- Over utilizing
One of the common mistakes people make when using their credit card is using it too much! Credit cards have a limit for how much the consumer can spend each month. Often times, a newer user will begin at a smaller limit and over time, as their credit score improves and if the user requests it, their limit will increase. What many people do not know though, or at least apply to their spending habits, is that just because a credit card may allow you to spend up to and even beyond your credit limit, it is not advisable or beneficial to utilize all of it. In fact, it is best to only use around 30% of your credit limit. The more of your credit that is used, the riskier you seem in the eyes of the lender. If you only borrow a small amount that is easily repayable, you will be looked at as more trustworthy than someone who uses the entire limit each month. This kind of credit “pitfall” is fairly easy to avoid, but so many people fall into it. The game plan to not hurt your score and to improve upon where it’s at already is simple: do not spend more than 30% of your limit.
Overall, credit cards have a variety of great benefits, but they are not without their drawbacks. Some of the most common pitfalls to be aware of are missing a payment, carrying a balance, and over-utilization. Having a credit card and knowing how to use it effectively can be an incredible part of financial independence. Powercat Financial is here to support and help you apply the simple steps mentioned above to each of these possible problems. We can help you understand credit cards and how to best use them for your specific circumstances. Sign up for a free and confidential financial counseling session at https://www.k-state.edu/powercatfinancial/.
