Can Credit Cards Play A Role In Achieving My Financial Goals?
(This is a two article series exploring the role credit cards play in achieving financial health. Part Two will be available soon.)
When I was in my twenties, I had, let’s say, 7 credit cards. It started with a new job and dress code needs: suits, ties, and nice shoes. I legitimately needed them for work but hadn’t even collected a paycheck yet. Did I really need 15 different outfits all at once? I admit I went a bit overboard. I clearly indulged in “wants” over “needs”, but I had the new job. Surely I could pay it off over time, right?
Enter the “unexpected expense”. I started having dental issues. And the emergency savings I didn’t have for suits, well, I didn’t have for teeth either. Once again, I reached for the credit cards. I quickly maxed them out, which had a seriously negative impact on my credit.
Why am I telling you this? Unless you’re just starting out with credit, chances are you have a story about your credit history. It may be more or less dramatic than my story, but it’s your story nonetheless. But this is not an article telling you that credit cards are bad and that you should never use them. Rather, I would like to share with you what I’ve learned from my own poor example, about how credit cards can be used to help build, maintain, or even repair your financial history, with the potential of rewards along the way. If you’re a shopper like I was, these rewards may include discount coupons, VIP access, or other exclusive offers. Some cards let you choose your own reward, like cash back or perhaps gift cards to your favorite restaurants and hotels. And, of course, there’s the classic “travel miles”, where responsible spending could help pay for your next vacation.
To find out whether your credit card experience is helping or hurting you on the path to financial health, let’s consider these five questions:
Do you usually carry a balance?
If so, be sure to regularly review the current interest rates on each of your accounts. Over time, rates may increase or there may be a better lending option to reduce these charges. Take a look at some of the first accounts you opened. Were they retail or gas credit cards? Typically, these cards are approved with a lower credit limit, where carrying any balance at all will affect your utilization rate, the percentage of available credit that you’ve actually spent. That percentage could actually be lowering your credit score.
Do you pay off your balances each month?
If you can’t pay off your balance in full, always aim to pay as much as you can. It may go without saying, but be sure to pay the minimum that you owe. You’ll notice your statement now indicates just how long it will take to pay off your account if you just pay the minimum. It puts the nature of debt and interest in stark relief. Keeping balances as low as you can or, better still, reaching a goal to pay off your credit cards may bring peace of mind when an unplanned expense arises and you need funds quickly.
Are you paying annual fees on any of your credit cards?
If you plan on taking advantage of a rewards-based card, be mindful that they frequently carry an annual fee in addition to their regular interest charges. Take the time to make sure they aren’t costing you more than the value gained by having and using these types of cards.
Are your rewards getting you closer to your financial goals?
In this day and age, credit cards really can help “finance” your next vacation; if that’s something you’re striving for as a financial goal. Or a program may offer rewards to your favorite store, allowing you to indulge a little. A commuter’s gas rewards may give her a little extra cash back for the time she spends getting back and forth to her dream job. If you’ve already budgeted for those expenses, the real reward is getting all these added bonuses in a way that advances your financial goals, rather than increasing debt.
Have you thought about being able to reduce or even pay off your credit cards?
So your credit card balances have crept up over time, but you own a home which may have built-up equity as well. Your home could help you take a bite out of that debt and lower your rate or eliminate it completely. If you haven’t done so recently, this may be the perfect time to review your consolidation options and potentially use that equity to save money and keep your financial goals on track.
If your answers to these questions demonstrated a positive approach to credit card use, give yourself a pat on the back, but continue to be vigilant about your spending while you enjoy your rewards. If your answers revealed some opportunities for better managing your debt and the way you use your credit cards, it’s important to get started right away. If you need help getting your credit card debt under control and your spending plan back on track, our dedicated team of financial counselors is only an email away.
In the second half of this discussion on positive credit card usage, we’ll consider the benefits of these products while also sharing the potential downsides and how to avoid them.