Credit cards and the credit conundrum

Credit cards and the credit conundrum

Let me preface this post by saying that I am definitely not perfect – and that includes my finances. For example, I am currently leasing a car. I have my reasons for that, but it admittedly is not helping my path to FI. I also go to restaurants several times per week. These are things I need to improve.

I’m pointing this out because I have heard that people reading personal finance blogs sometimes get the impression that those writing them must be doing absolutely everything right. Trust me, I am still far from perfect, but I am doing what I can to improve.

That being said…

Credit is one of my strong points

For all my shortcomings in finance – and in life – one thing I feel I can brag about a little bit is my relationship with credit cards. I mean, check out my Chase Freedom card, which I opened just over 6 years ago:

Chase Credit Card

My cards look like this more often than not; I usually pay them off in full as soon as charges are posted. Most people probably don’t go that far and only pay them off at the end of the month, but I’m a little obsessive.

As a result of this, not only have I never paid a single dollar in interest, but I have nearly always had an excellent credit score. That’s great, but I also realize things may not look this good for everyone. And that’s unfortunate when you consider the whole purpose of these little pieces of plastic.

A revolving door to financial hardship

Wikipedia defines credit cards as a revolving account, where the cardholder is not required to pay the balance in full each month. But, of course, that this is an extremely slippery slope.

Related: Should You Use Credit Cards? Maybe, Maybe Not

Even the terminology itself is dangerous. After all, if you don’t have to pay your balances in full each month, why would you?

Well, here’s one reason from CNBC:

The average household has $6,081 in credit card debt. If you only make the minimum payment, you will pay an average of $4,064 in interest before the balance reaches zero. If you add just $100 to that payment, though, you will pay $1,409 in interest. Similarly, it will take you a whopping 169 months to pay off that debt if you pay the minimum, vs. 41 months if you add $100. What a difference!

“We’ll only lend you money if you have money.”

No, that isn’t a real quote – at least not to my knowledge. However, it sums up what might be the biggest flaw in the way credit cards work. See, the other problem with only making the minimum payment is how that will affect your credit score.

According to Credit Karma, your credit utilization has a high impact. Your credit utilization is the percentage of your limits that is currently owed to the card company.

Thus, if you owe against a significant portion of your total credit, that will undoubtedly drop your credit score. As a result, it will be much more difficult for you to be approved for a loan for a house, a car, or whatever you may need.

Are you are starting to see why this is such a problem? Indeed, those who are impoverished are much more susceptible to falling victim to the vicious cycle that credit cards can create.

So, what can you do about it?

If you are at that average of $6,000 – and certainly if you are above it –  I would not recommend paying the minimum. Even paying the minimum +$100 is not ideal, since it will still take more than three years to eliminate your balances. If you are in this situation, all I can say is that you need to pay as much as you possibly can.

Hopefully, you can eventually pay your balances in full. It may be helpful to look into balance transfer cards.

After that, it is very important to keep up those good habits! At the very least, I would recommend paying off your balances in full every month. As I alluded to earlier, not only will help you avoid interest charges, but it will improve your credit score as well.

Whatever your goals may be, eliminating those steep fees from your life is an absolute necessity. Credit cards can be a very nice tool, but only when used properly. So, let’s get back on the right track, starting…now!

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