This post is sponsored by Lexington Law. All opinions are my own.
81% of Americans own a credit card and the average cardholder keeps at least three cards in their wallet. With stats like this, it’s easy to see how the average household is $6900 in debt, and why cards are so heavily utilized.
Depending upon your own spending habits, cards can either be a great financial tool, or sneaky enabler for financial irresponsibility. I’m here to make the case credit cards aren’t all bad, but first, let’s talk through why (and when) credit cards can become your enemy.
Why credit cards can be your foe
- High interest rates that compound
- Card companies allow minimum payments each month so you don’t have to pay it back right away
- They’re easy to use, enabling you to live beyond your budget
How they become the enemy
Anytime you do not pay the balance on your card in full, card companies will charge interest, which is ultimately what they want. This is how they make money!
Did you think those sexy airline rewards come free?
Here’s an example of how quickly this thing can spiral.
Cards have an Annual Percentage Rate, but they also have a daily rate (your APR divided by 365 days in a year). So, say Sally Ann spends $2000 on Coachella Tickets on her 20% APR card and only pays the minimum $100 payment in February.
March 1, her balance is $1900 and this amount is multiplied by the daily interest rate (.0005) and the card company adds a $1.04 daily interest charge. Then on March 2nd, her balance is 1901.04 and then this amount is multiplied by the daily rate (.0005) and so on and so on so the balance grows and grows.
Using daily interest calculations, you can see how quickly one time purchases made on credit become so much more expensive and troublesome.
When credit cards can be your friend
For the longest time, I avoided credit cards. I’d had problems with them in college and I wanted to live life without them. Then, I got a business card and received 60,000 points as a signup bonus and was able to travel to Italy with them for FREE.
Suddenly, I was very interested in what credit cards could do. I never really got the hang of travel hacking, but my husband and I still use cards today to monitor what we spend as a family unit and keep tabs on our budget.
Here are some ways credit cards can actually be a great tool.
- 0% balance transfer offers to pay off debt faster
- Reward points and cash back to save up for travel
- Making it easier to monitor spending between family members
- Large purchases in a pinch
How to make sure credit cards stay your BFF
Situations like the one with Sally Ann and the Coachella tickets can be easily avoided with the same old advice you hear everywhere – use the cards, get the points or cash back, and then pay the balance off in full, every single month.
If you’re really interested in credit hacking, you’ll need to become very organized and pay strict attention to what you need to do to get the bonuses and optimize your card spend.
I’ve never been able to master it, but it can be done. Here’s one of my favorite posts on how to get started travel hacking if you’re interested.
Your game plan for staying friends with your credit cards:
The difference between healthy credit card use and debt troubles is living beyond your means.
Sometimes this is unavoidable (like in the instance of illness or job loss and no safety net), other times this is just wanting (and spending) more than you’re able to afford.
Your greatest weapons are a strong budget and healthy savings. Sometimes in order to save more money, you’ll need to live on less. While this isn’t fun, even $1,000 in savings can go a long way to ensuring the overages of your life stay off the credit card, and out of the card company’s pocket.
- If you’ve been overwhelmed with debt, which has led to unfair negative effects on your credit, or even if you feel there are inaccuracies on your credit and would like your credit card spending to be smarter, look into credit repair services such as the ones offered from Lexington Law firm.
- If you’ve got less than $10k in debt but would like to live debt free, check out my FREE course The Debt Master Plan.