Navigating Credit Cards

6 min read
August 09, 2016


Navigating Credit Cards

Last week I got an email telling me I could get $30 off a purchase of $150 or more if I used their company credit card. It was very tempting. I started putting together an order. A few items I’d been meaning to get. It was nowhere near the necessary $150. I started trying to think of things I wanted to build up my order. Then I stopped. I didn’t really NEED anything in the order. While 20% off is a pretty good deal, I still had to spend $120 to get that deal. Since I have only recently launched a new business, I really can’t afford to spend money without reason.

The experience got me thinking about how easy it is to run up credit card debt. We are bombarded with “deals” from all sides. The promise of cash back or airline miles to make us think we are getting something for free. Or we are told we need a credit card to build a credit.

Household credit card debt is on the rise again in the US. According to Value Penguin, the average American household has $5,700 in credit card debt. If we look only at households who carry a balance on their cards (ie: do not pay the full balance each month), that number rises to $16,048. If that amount was carried on a card with a 17% interest rate (most cards charge between 13% and 24% interest) payments of less than $230 per month would not cover the interest and the balance would continue to grow. If you were to pay $250 each month (with no additional charges), it would take over 14 years to pay off that balance and you would end up paying nearly $42,500.

It is important to understand the cost of using a credit card and ways to keep the balance from getting away from you.

Create a Budget: If you ask most people how much they earn in a month, they can give you a pretty good idea. However, if you ask them how much they spend monthly, you will probably get a blank stare. Taking a long look at your income and spending might be very enlightening. When you start to see how those trips to the coffee shop or the “occasional” pizza start to add up, you may be surprised. Since your credit card is not tied to your bank account, you can run up a quite a bill without seeing a change in your checking account balance. Don’t think of a budget as restrictive. It is a structure that allows you to monitor your cash flow and maximize your spending and saving. If you are not keeping track of your cash flow, when the credit card bill comes along, you could be in for quite a shock. At the very least, check your balance once a week to keep your spending in check. Budgeting software such as You Need A Budget (YNAB) or Mint allow you do download your transactions. Without a budget and some thought to articulating goals to save towards, you are probably going to overspend.

Start an Emergency Fund: This is a key part of any financial plan. Ideally this will hold between 3 to 6 months of expenses in cash. You may think you have better uses for that cash but you will be happy to have it there when the car breaks down unexpectedly or a computer virus crashes your hard drive. One of the surest ways to get into debt is to find yourself in a situation where you must pay (hospital bills and car repairs are prime examples) but don’t have the funds on hand.

Know How Your Card Use Effects Your Credit Rating: People tell you that you can’t have a credit rating without a credit card. And, of course, credit ratings are used for all sorts of things from loans, apartment rental applications and sometimes even job applications. Your credit rating is also a factor in the interest rate you pay on your credit card. How you manage your credit card is more important than just having a credit card. While the ultimate formula for credit scores is a bit mysterious and involves ALL debt and bills, these are two important factors:

Pay Your Bills on Time: Any late payments on any bill will negatively affect your credit rating. You don’t necessarily get any brownie points for paying bills in a timely matter but one late payment on a $50 bill will be a ding on your record. The issue is that you made a late payment, not the size of the bill.

Watch Your Debt Burden: Your debt burden is the amount of debt you have with respect to your credit line. If you regularly hit the limit on your card, your credit rating will be negatively affected. Lenders want to know you can manage your credit. In general, it is recommended that you keep your debt burden at less than 30% of available credit.

Learn to Use Your Card to Your Advantage: If you track your charges and make sure you are staying within your spending limits, credit cards are a valuable tool in your overall financial picture. Take advantage of what they offer.

Are You Paying Too Much For Perks? If your card charges a fee, what are you getting for that? Is it really worth it? I get offers for an airline card which would let me get on board early and check one bag free but there is an annual fee of $99. If I don’t make at least 2-4 trips where I plan to check a bag (figuring a $25 bag fee) that card is not worth the perk. There are cheaper ways to get free miles. There are plenty of cards that offer cash back with no annual fee.

Pay Attention to Your Billing Date: Know the monthly cutoff date for your card. This way you can buy yourself an extra month to pay off a purchase. I have one card that closes around the first weekend of each month and one that closes around the third weekend of each month. The date of my purchase may determine which card I use. Items that are charged early in the cycle will not come due for nearly 2 months whereas a purchase made days before the end of the cycle will be due much sooner. Having an extra 3-4 weeks to pay for a high ticket item could be very beneficial.

Don’t Believe the Hype: Cash back sounds like a great thing. In fact, it is a great thing. Just keep in mind that if you do not pay off your credit card in full each month, that 1%-2% you are getting back is being offset by an average of 17% interest. That is a losing formula. Additionally, you should realize that those miles or cash back are being paid for by the merchants who accept your card. You may see merchants who offer lower prices or special perks to clients who pay cash or they may insist on a minimum amount to charge. In the recent past, Blue Cross Blue Shield of Illinois has stopped accepting credit cards to pay premiums and the City of Chicago charges a fee of 1.86% if you want to pay a parking ticket with your credit card.

Credit cards are a great tool. They facilitate purchases online, they allow us to carry less cash around and they give us a little extra time to come up with funds for major purchases. You just need to remember that those benefits come with huge penalties if you do not take responsibility for your charges. Take some time to think about what your goals are (buying a home, taking a vacation, retiring before you are 65) and whether you are saving enough to reach those goals.


This post originally appeared on Indie Financial Planning.


Leslie_Ransom_HeadshotAbout the Author: This post originally appeared on Indie Financial Planning. Leslie Ransom is a Certified Financial Planner™ and the founder of Indie Financial Planning, a financial planning firm that caters to self-employed entrepreneurs who are looking to plan for a future on their terms. You can learn more by connecting with Leslie on LinkedIn.