Credit Where Credit Is Due
Some people abuse credit cards, some are abused by them, and many fear them. But it needn't be so.
63 percent of Americans are living paycheck to paycheck. 57 percent cannot afford an unexpected expense of $1,000 without borrowing. Nearly six in 10 don’t even have $500 in savings. With inflation still at a generational high, economic confidence is underwater. People are increasingly turning to credit cards. Credit is a controversial issue. Some people abuse it. Others are abused by the companies who offer it. Still others fear it and steer clear. It needn’t be this way. Credit can be an enormously useful tool if properly understood and used.
The paradox of credit is that those who most need it have the least of it, and those who need it least have the most. 80 percent of Americans have at least one credit card. For families with annual incomes of $100,000 or more, this rate is 98 percent. For families with annual incomes less than $25,000, by contrast, the rate is 56 percent. Broken down by education, 96 percent of adults with a bachelor’s degree or more have a credit card, compared with 48 percent of people with less than a high school degree. This is not due to lack of access. If anything, the Great Recession of 2008 showed that there may be too much access to loans for those least able to repay them. The issue is one of fear. People fear what they do not understand, and those without much money tend to be the least familiar with financial matters.
Many regard credit cards as a kind of monetary narcotic whose addictive allure and chemical hooks are so potent and devastating as to best be avoided altogether. They may not know the statistics — that more than half of Americans carry a credit card balance (with 15 percent having carried a monthly balance for more than 15 years!), or that nearly one in five has more than $20,000 in credit card debt. They are likely unaware that 49 percent depend on credit cards to cover basic living expenses, or that the overall amount of credit card debt in the US has hit an all-time high of $930 billion. But everyone has heard the horror stories or known someone for whom they became a nightmarish reality. Credit cards are indeed no joke. Misuse them and you’ll be in a world of hurt.
Credit card woes, however, are rarely the product of addictive behavior. Compulsive buying disorder has a lifetime prevalence of only 5.8 percent in the US. If you believe you have truly pathological spending tendencies and honestly don’t trust yourself, then perhaps credit cards aren’t for you. That isn’t the norm, though. What spirals some into crushing debt while scaring others away entirely is not usually a deficit of impulse control, but of understanding. To best use credit, one must understand its uses.
The true utility of a credit card is not in purchasing things you cannot afford in order to pay for them in increments over time. They are not best used as a replacement for loans or financing — and certainly not as permission to spend far beyond your means. Credit cards generally carry higher interest rates than other forms of borrowing. So why use them at all? Because credit cards are tools. Enormously useful tools, if used prudently. They can improve your credit score, insulate you from fraud, simplify your finances, and offer perks and rewards. And for those whose finances are tight, they provide some flexibility and breathing room to make ends meet in between paychecks. All of this hinges on never carrying monthly balance — in other words, in paying the card off in full every single month. Carrying balances means paying interest. When paid off every month, the interest is avoided.
Running your daily expenses through a credit card and paying it off every month provides a number of practical benefits. It improves your credit score, allowing access to more favorable financial services, especially when buying a car or home. It provides an easy way to track your spending habits. It frees you from having to carry as much cash. Most cards also provide reward points based on a percentage of your spending, which can usually be redeemed as cash back. Virtually every major credit card offers fraud protection as well. So long as you prevent paying interest, it’s pure upside. In essence, you’re gaming the system. Would you rather have credit card companies pay you money or leave that money on the table?
If you have no credit, or poor credit, your first credit card will likely include very high interest rates and very low credit limits. This is to be expected. But credit scores can be dramatically improved in only a few months spent paying them off regularly, at which time you can upgrade to a better card. In general, do research before making any decision. Shop around. Get second opinions. It’s worth the time. Avoid having a bunch of credit cards. One is plenty. If you have more than one, don’t use card one to pay the other. That kind of credit cannibalism leads to dark places.
Financial literacy is only taught in 30 percent of public schools (a scandal in its own right). It falls therefore to upbringing. But not everyone is raised in a household where financial matters are discussed around the kitchen table. This article cannot be a replacement for either of those, of course, but it is my hope that it provides an invitation and jumping-off point to learn more on one’s own. Financial matters can seem quite daunting to the uninitiated. There are entire industries built on profiting off of people’s ignorance. It’s easy to get burned, and understandable to be afraid. But, as H.L. Mencken once observed, “Knowledge is not only power; it is also courage.”
See also: “Raise the Floor, Lower the Temp”
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