Credit cards are bad, horrible, terrific financial monsters created to make the banks rich. They are the epitome of capitalism and no one should ever have one. Yet 70.2% of American households have a credit card, 55% of Americans with a credit card have debt, and 50% of Americans have a maxed-out credit card. Those are staggering numbers, especially when you think realize that total U.S. credit card debt is $870 billion at the end of 2018.
I decided to look up some numbers to see how this works out for the average family. The average interest rate for an existing account is 14.14% but for all new offers its 19.24%. The numbers are worse if you have bad credit, that rate is 22.57%.
Looking at these numbers I can see why growing up I was told that credit cards are the equivalent of the financial devil. That’s the bad side of credit cards. But then why do so many American’s have a credit card if they are so bad. I am speculating but from my experience people have credit cards because they are convenient and easily to get, they allow you to spend beyond your means, with instant gratification and deal with the consequences later. But it is not all bad. there are some good things about credit cards when used the right way.
Credit cards help you build up your credit, many young people get them to first develop their credit or people that have ruined their credit can use a store card with a low limit to rebuild their credit score. There are also a lot of nonmonetary reasons to have a credit card. In I Will Teach You to Be Rich by Ramit Sethi explains those benefits in detail. (I highly recommend his book). But the reward systems for credit cards is what gets people excited. Getting cash back for purchases you would make anyways is awesome. Looking at American Express’ (AXP) 2018 Annual Report they paid out $9.696 billion is rewards, $8.687 billion in 2017 and $7.819 billion in 2016. That is a lot of rewards for one company and it is only increasing. If done right, you can receive rewards and not pay interest.
Deciding to get a credit card
If you have credit card debt already, I recommend your priority is to pay off that debt before you consider the benefits of a credit card. It takes discipline, planning and self honestly to maximize the benefits of a credit card but if you can do that then a credit card is a great option in building credit and getting free rewards. Deciding if a credit card is right for you is the first step. Being honest with yourself is hard and those people that are honest and realize they cannot control themselves with a credit card are a step ahead of the rest of us. You also need to look at your other debt obligations along with income. Ideally you would be spending anymore with a new credit card than you did before but that is not always the case. Or maybe you are trying to lower your spending to pay down debt. Either way if you determine that a credit card would be beneficial then it is important to find the right one or two cards for you.
Picking a credit card
Once you determine that you can trust yourself to have a credit card and want the benefits beyond building credit it is important to find a good credit card. There are a lot of websites that will list the benefits of different credit cards along with fees and APR and any other relevant information. In order to receive the full benefits of a credit card you need to pay off the full balance every month. I recommend setting up automatic bill pay each month to pay off the full amount. That is because if you don’t want to pay interest you need to pay off your bill. Also, to maximize the benefits you should be using your credit card for all your purchases that you can. Now you need to pick the best credit card for you. This is the easy part, I used Excel and put in how much I spent on different categories and found the credit card that gives me the most benefit. It is important to think about what kind of rewards you want; do you want hotel, miles, or cash back. It’s not a bad idea to have two with different rewards like cash back and miles.
I just picked some random cards. The important things to look for is what will your rewards be the first year and each subsequent year after that. The best thing to do would be to narrow it down to two cards you are deciding between and run the calculations off those. For me, most of the companies have a card with zero fee but lower benefits and then a card with a fee and higher benefits. That is where the calculations are important. Do not be fooled by the sign-up benefits, yes zero APR for one year is nice and $250 is also nice. But they are only one-time benefits and you will probably have this card longer than a year so the second year and beyond are more important. A general rule of thumb is if you spend more, the cards with fees are usually better. That is because the fee is fixed while the rewards are based off your spending.
There is a reason credit card companies are so profitable, and it isn’t just the business model. Credit cards are not for everyone as a lot of people abuse them and end up having to pay way high interest rates. Those people subsidize the rewards for the people that take advance of the credit card. But at the end of the day only you can decide if a credit card is right for you.
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Barro, J. (2019, January 28). Banks Don’t Like Paying You So Many Credit Card Rewards — But They Will. Retrieved from http://nymag.com/intelligencer/2019/01/banks-dont-like-paying-credit-card-rewards-but-they-will.html
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