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cash & credit cards

There are two types of credit card customers:  revolvers and transactors.  Revolvers carry a balance from month to month, and are the money makers for credit card companies because they also pay interest, and sometimes late payment fees.  Transactors pay off their balance every month, thus avoiding interest charges and late payment fees. Transactors are called “deadbeats” in the credit card industry because they don’t generate anywhere as much income as the revolvers.

Here are some fun facts:

  1. The American Bankers Association found that 42% of Americans carry credit card debt from month to month – the revolvers
  2. reports that the average credit card balance for revolvers is $7,527
  3. According to a NerdWallet report, the average interest paid annually for each revolver is $1,292.

Here’s how to be a deadbeat (transactor) and save thousands in interest charges each year:

Don’t carry a balance.  If you pay off your credit card balance each month (or even twice a month) you will never pay interest charges.  Some people like to pay the balance every time they get paid.  If you get paid every two weeks, and you pay the balance off every payday, you are guaranteed to never be late, never pay interest and the balances should always be manageable.  The trick of keeping the monthly balance manageable is to avoid temptation.  If you cannot pay for something in the next 30 days, you may be better off not purchasing it, or using a different type of loan with a fixed term (but not a payday loan!)

Pay on time.  This way you avoid paying interest charges (see above) but also late payment penalties.  Again, paying your balance every time you get paid should do the trick of avoiding late payment penalties (which can be surprisingly hefty) and damaging your credit score.

Don’t carry too many cards.   One or two should be enough. If you are new to establishing credit, get just one credit card. Many financial institutions offer a secured credit card, which is attached to a deposit account.  If you get a secured credit card, you will have to pledge the balance in your deposit account, up to the amount of your credit limit, for as long as you have the card.

Look for a credit card that gives you rewards and doesn’t have an annual fee, like one of these.   If you go for a rewards card that comes with an annual fee, just make sure the rewards outpace the fee. Having more than two credit cards can be harder to track and manage.

Don’t bump up against your credit limit.  Your credit utilization rate is the ratio of your balance at the close of your billing cycle compared to your credit limit.  According to Experian, you should aim to keep your credit utilization rate at no more than 30%.  Going over that threshold can damage your credit score. A high credit utilization rate is interpreted by credit scoring models as possible overspending and not-so-stellar money management, and therefore riskier.

Know the terms and conditions of your card.  Although this section of a credit card agreement is boring and long, read it anyway.  Take your time.  Understand what the payment grace period is, what the late payment penalties are, what the interest rate is and if it is increased if you are late on a payment.  Are there additional fees if you go over your credit limit?  Is there a separate interest rate for cash advances?

Credit cards can be great tools for manage your finances.  They allow you to consolidate multiple bills into one payment.  You can put many recurring payments on a credit card, such as your mobile phone bill, and your Netflix and Spotify subscription.  The majority of credit card accounts can be paid online, with the payment being deducted electronically from a deposit account.

Credit cards are also a more secure way of transacting business.  Compared to debit cards, credit cards carry more protection if someone gets ahold of your card and makes fraudulent charges.  Many credit cards carry purchase protection, which debit cards don’t.

The down side is credit cards can easily get out of hand if you don’t pay close attention and use discipline.  Using the tips above, should keep anyone out of credit card debt.