Avoid a dangerous trap
Cash back rewards. Low introductory interest rates. “Priceless” experiences.
But while they can be powerful financial tools, financial experts also warn that credit cards can quickly and easily become a slippery slope to debt.
“Credit card debt is a national issue. That is a national trend: high amounts of credit card debt,” said La Tasha Shevlin, financial empowerment educator with the University of Minnesota Extension Office.
According to the U.S. Federal Reserve, the national credit card debt was more than $850 billion as of March. On average, Minnesotans have about $10,000 in credit card debt, a 2012 study from the Washington nonprofit Corporation for Enterprise Development showed. Wisconsinites average just under $8,000.
Credit cards are dangerous, Shevlin said, simply because they allow consumers to purchase things that they don’t have the funds for. And very low minimum payments often make people lose sight of their entire debt.
“You just look at, ‘I just have to pay $25 every month.’ That appears to be manageable,” Shevlin said. And credit card debt is not tangible, she said. “It’s so easy to get into trouble with it.”
The first step to staying out of credit card trouble, Shevlin said, is not signing up for a card on a whim. Do your homework, she said, and make sure you know exactly what you’re signing up for.
“Actually have a conversation with someone first,” she said.
When speaking with a credit card company representative, ask about the card’s interest rates and whether they are introductory. Also, find out whether there is an annual fee. Shevlin advises staying away from any cards that charge an annual fee.
“Save yourself the money off the bat,” she said.
Because some cards may initially not have an annual fee only to have one added in after an introductory period, Shevlin said make sure that you’re asking very specific questions.
“You really have to ask, ‘Will there ever be an annual fee?’” she said.
The same rules apply to retail or store credit cards, Shevlin warned. Don’t get persuaded to sign up for a card simply to take advantage of a sale that’s going on that day. Actually think about how often you shop at that particular retailer and if you will be able to pay off the purchase.
“If it’s a retailer that you frequent, and you’re able to pay it off, then go ahead,” Shevlin said. “Be selective about who those retailers are and don’t do them on a whim because of a 30 percentage off of your current purchase.”
Shevlin added that retail cards are often easier for people to get than normal credit cards because retailers want consumers coming back to their stores. And a wallet full of retail cards will bring down your credit score quickly.
“Lenders (see that) you’re not using your credit wisely,” she said. “You’re always trying to buy something, always trying to access something.”
One other thing to think about — and be weary of — when signing up for a new credit card is any rewards that may come with it. The key here, Shevlin said, is to not get blinded by the rewards and use them as an excuse or justification for putting purchases on that credit card.
“We hear the word reward and we automatically think it’s all gain,” she said. “But if you’re racking up high balance, the rewards aren’t worth it.”
The best way to reap a credit card’s rewards without getting yourself in trouble is to pay off your balance every month, Shevlin added.
If you do find yourself buried in credit card debt, Shevlin said there are multiple ways to go about tackling it: pay off debt that has the highest interest rate first or pay off cards with the lowest balance first.
“I personally prescribe to a pay off your smallest debt first,” Shevlin said. “Only because it shows you small rewards. If you see that you’re making progress then it gives you the motivation to pay others off.”
No matter what route you take, Shevlin suggests paying more than the minimum payment every month, doubling it, if you can. And build that amount directly into your budget to ensure that you’ll have those funds available every month.
Once the debt is paid off, Shevlin said the best way to use a credit card going forward is to pay off your balance every month. Or only use them in emergency situations.
“People think a credit card is an easy way to build credit, but it’s also the easiest way to damage credit,” she said. “There are other ways that are safer for individuals to accrue credit that don’t lead us down this tumultuous path that credit cards do.”