Half of Americans Received No Education on Credit Cards; That's a Problem
June 14, 2018
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If you juggle multiple credit cards and carry a balance, you’re not alone. According to Student Loan Hero, cardholders in the United States have $5,234 in credit card debt, on average. Millions of people have credit card debt, making it one of the most serious financial issues affecting individuals.
How did we get into so much debt? A recent study from Credit Cards Explained found that approximately 50 percent of consumers said they never received education about credit cards, leaving them to fend for themselves. Without understanding how credit cards work, it’s easy to understand how people got over their heads in debt.
5 things you should know about credit cards
If you’re one of the 50 percent who never received information on credit cards, here are five things you need to know.
1. Credit cards can help develop a strong credit report
It’s important to know that credit cards aren’t evil. Some people are so debt averse that they refuse to have or use a credit card. Although that can prevent you from racking up a balance, it can be a mistake. That’s because credit cards can help you build a strong credit history and a high credit score.
Your FICO score — the most commonly used credit score — is determined by a variety of factors, including on-time payments and how many different forms of credit you have. Having a credit card and making your minimum payments — or even better, paying off the balance in full each month — can help boost your credit score.
2. Promotional offers have an expiration date
It’s easy to be persuaded to sign up for a new credit card when they boast special offers like 0% APR for six months. However, it’s important to pay attention to the offer’s end date; the card’s terms can change dramatically once the promotional period is over.
For example, the Chase Slate® card has an incredible promotional offer of 0% APR on purchases for 15 months. However, once that period is over, your interest rate can be as high as 25%, depending on your credit score.
Before signing up for a new card, make sure you understand what the rates are for after the promotional period.
3. Credit card interest can make your purchases more expensive
Many people see credit card interest rates without thinking about how those rates really impact the cost of their purchases.
Credit card interest works differently than some other forms of debt. Credit cards use Annual Percentage Rate (APR), which means interest accrues on a daily basis.
To find out how much you’re paying each day, divide your APR rate by 365 — the number of days in a year. That’s your daily rate. The credit card company will multiply your current card balance with the daily rate to come up with your interest for the day, which is added to your balance.
For example, if you had a $1,000 credit card balance and an APR of 25%, your daily rate would be 0.068493%. Your credit card issuer will multiply your balance by the daily rate to calculate your interest. In this case, your balance after the first day would be $1,000.63. On the second day, interest is calculated using the new balance amount.
Having a few cents added might not seem significant, but it can cause your balance to balloon over time. which is why your balance can grow significantly.
For example, if you charged $500 on a credit card with 25% APR and only made the $15 minimum payment each month, it would take you 58 months to pay off the purchases. Worse, you’d pay $362.55 just in interest charges.
4. How much your charge on your card is a big deal
When you get a new credit card, it can be exciting to find out you have a higher credit limit. However, it’s important that you don’t actually max out your cards.
When determining your credit score, FICO looks at your credit utilization, or the amount of credit you use relative to the maximum lines of credit you have. The lower your credit utilization ratio, the better for your credit score.
For example, if you had a credit limit $10,000 and currently had a balance of $8,000, you have a high credit utilization ratio. Paying down the balance to $4,000 or below improves the credit utilization ratio and boosts your credit.
5. The interest rates on card cash advances are different
Most credit cards offer cash advances, where you can get money deposited directly into your bank account. Although you might think this is a great alternative to applying for a personal loan, you should know that cash advances typically have much higher interest rates than regular credit card purchases.
For example: If you have good credit, you could qualify for an APR as low as 14.49% with the Capital One® Venture® Rewards Credit Card. However, if you took out a cash advance, you’d be subject to a 24.49% APR charge.
Understanding credit cards
Before signing up for a new credit card and making purchases, it’s important to take a step back and understand how the card works, what fees are attached, and how the APR can affect your balance. By reviewing the card terms, you can ensure you make sound financial decisions.