To Inform:

Credit card debt has become a pervasive issue in the United States, with millions of Americans carrying balances month to month. The convenience of credit cards has made it increasingly common for individuals to rely on credit to cover daily expenses. Credit card companies market them as an effortless way to pay for things while building your credit through small monthly payments. For many, holding a balance has become a routine aspect of financial life, often seen as a necessary trade-off for managing short-term needs and maintaining financial flexibility. However, the downsides of improper credit card use can significantly impact your financial future. Let’s look at the key do’s and don’ts of credit cards.

Do:

• Check your credit score: Credit experts recommend that you check your credit scores at least once a year or multiple times a year depending on your financial situation. Take advantage of the free credit score reports offered by the major credit bureaus: Equifax, Experian, TransUnion, and Consumer Financial Protection Bureau. By checking every year, you can stay on top of any fraudulent activity and watch for changes in your score.
• Utilization score ratio: Your credit score still fluctuates even if you pay your credit card off every month. The amount you spend compared to your card limit can decrease your credit score. The equation is simple, just divide the card’s total balance by the credit limit. Card companies suggest keeping the ratio lower than 35% and ideally below 10%. For example, if your credit card has a $10,000 limit and your total balance is $5,000, your utilization score ratio is 50%. You can mitigate this by making a payment in advance of your statement date to bring the utilization score back down.
• Find a card that fits your needs: Choose a credit card that meets your financial needs. Rewards cards offer points, cash back, or travel miles for purchases, making them ideal for frequent spenders who pay off their balance every month. Secured cards require a deposit and are useful for individuals looking to build or rebuild their credit. Lastly, student cards are tailored for young adults, offering basic rewards and lower credit limits to encourage responsible credit use.

Don’t:

• Ignore the monthly statement: Be sure to check your credit card bills for hidden fees, such as: late fees, annual fees, or over-limit fees. Frequently check the interest rate your credit card charges. On average, credit card companies charge 22.78% in 2024.
• Hold a balance: If you carry a balance it can lead to high interest payments if not paid off at the end of each month. Paying them off completely and on time shows consistent credit usage. Keep track of your spending to evaluate where you might need to improve your financial plan and stay on track with savings goals.

Methods to pay off credit card debt:

Snowball method: The snowball method is a popular debt repayment strategy designed to help individuals pay off debts in a systematic and motivating way. The key idea behind this method is to focus on paying off smaller debts first, then gradually moving on to larger ones, creating a “snowball” effect as momentum builds.

High-low method: The high-low method of paying off credit cards prioritizes high-interest debt first and then moving on to the lower interest debt later. This approach minimizes the total amount of interest you pay overtime.

Consolidation method: Debt consolidation involves combining multiple debts into a single loan or payment plan, usually with the goal of simplifying payments, reducing interest rates, and potentially lowering monthly payments. This approach helps manage multiple debts, such as credit card balances, personal loans, and other unsecured debts, by consolidating them into one loan with a lower rate.

Credit card debt can have an impact on your financial stability. High-interest rates can quickly turn manageable balances into overwhelming burdens, limiting your ability to save, invest, and achieve financial goals. Paying off credit card debt avoids these dangers and can free up resources for future opportunities. Using credit cards to your advantage can help to build a strong credit score and reap the associated rewards. Remember to track your purchases, stay mindful of your credit limit, and resist the temptation to carry a balance.

Written by Jane Gum, 2024 Summer Intern