Building your credit is important but using a credit card can almost be compared to playing with fire. Sure, fire can come in handy, but burn too much and that bonfire can get out of control. Did you know that the average US household credit card debt is at $15,863 (counting only the households that have credit card debt)? If you take into account all of the households (even those without debt) the average household still owes $7,400.
The only debts that are ranked higher than credit card debt in the average American household is mortgage debt ($156,584) and student loan debt ($33,090). Now consider the fact that a lot of households have all three… That is a lot of numbers in the red.
Some consider this to be a good sign because the high consumer spending means that the economy is back on the right track but does that have to come at such a high cost to the modern home?
This is one of the reasons why credit cards get such bad press but it almost seems warranted, doesn’t it. Credit card companies make money when you make financial mistakes, after all. Your financial health depends on your ability to handle these responsibilities while armed with knowledge.
Yes, you need to use credit cards to help build your credit but what pitfalls are there (other than falling into debt)?
#1) They can also damage your credit score
Your credit score affects many aspects of your life: finding and financing a home, how much you pay for insurance, interest rates on mortgages and other loans, and your jobs. The more debt you are in, the lower your credit rating, the less likely you’ll be able to get those essentials at a decent rate.
#2) Those fees are outrageous
The interest rates alone should have your head spinning. Credit card rates can be an average of 30%. When you borrow money with an interest rate that high, you’re not really helping your finances. Sure, we know how to responsibly use credit cards (only use them enough that you can pay off the balance at the end of the month) but when an emergency pops up, you’ll be using those cards for more than just paying for groceries.
In addition to interest rates, there are also annual fees, late fees, balance transfer fees, foreign-exchange fees, etc. There are so many fees involved in using the average credit card.
#3) Manipulative Minimum Payments
Do you know why credit cards set the minimum payment so low? They do so to extend the loan as long as possible so that you will pay more in interest. Minimum payments are often only between 2 and 4% of what you actually owe. At this rate, you’re merely paying for the convenience of a credit card, not paying off the actual balance.
Being irresponsible with a credit card can cause a lot of damage to your finances and your credit score. It is important to keep yourself informed about all of the variables and factors involved in credit cards before you apply for them. Look at your spending habits to decide which option would be best for you: what type of card (credit, prepaid, bank, etc.). You may find that not using a credit card is better for you in the long run.
It might be DULL and BORING, but you should read the disclosures on your credit card. Banks are required by law to provide the “GOTCHA’s” in layman’s terms.
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