Upbeat Wealth on the News: The Truth Behind Credit Cards
Upbeat Wealth Founder Mike Turi joins Great Day Louisiana’s Malik Mingo to discuss the truth behind credit cards. Check out the video and the blog below for the good, the bad and the ugly!
The Biggest Credit Card Myths
Closing a Credit Card Does Irreparable Damage to your Credit Score: Credit history is a small component of your overall score. Yes, be cautious about the timing of closing credit cards if you are actively shopping for a car or home, but do not sweat closing a credit card that charges you an annual fee greater than your benefits.
Making the minimum payment doesn’t result in interest charges: However, unless you have a 0% introductory rate, interest will accrue on the unpaid balance over the minimum payment. To avoid interest charges, pay off your full statement balance on time.
Having more credit cards is a sign of money trouble and overspending: Having multiple credit cards can make it easier to categorize and track spending. Additionally, many consumers have the time and talent to play the points game without sacrificing their financial stewardship.
Common Mistakes
Overspending: You are dangerously treading water if you consistently purchase items on credit that you couldn’t purchase outright. The average interest rate across credit cards is 24%. If you cannot pay your unpaid balance and that interest starts to compound, it’s a very tough situation to get out of.
Foreign transaction fees: Know if your card charges one before traveling internationally or making international purchases.
Chasing rewards: Do not put the cart before the horse. Churning credit cards or inefficiency tracking your expenses may prevent you from having control over your cash flow. For most, it’s better to optimize rather than maximize. Understanding your actual cash flow so you’re spending/saving with intention is more powerful than grabbing every last mile on vacation booking.
How to Use Credit Cards Responsibly
Credit cards aren’t inherently bad. Consumers receive great benefits such as convenience, purchase protection, and rewards!
Charge what you can afford: Treat your credit card like it’s a debit card or cash. While technically borrowing money from the credit card company, you're actually just borrowing from your future self if you struggle to pay your entire balance on time.
Building credit: Credit cards are a great way to build up your credit for making bigger purchases that require a secured loan, such as a home or car. Interest rates are correlated with the strength of your credit.
Understand your redemption options: Earning points is easy, but understanding their value and properly redeeming them is rather complicated.
Finding the Right Credit Card
If you can responsibly use credit, I recommend having a few different credit cards. Assigning spending categories to credit cards makes tracking your spending and maximizing your rewards easier. This is especially helpful if you are trying to limit spending on a specific subcategory. By keeping it on 1 credit card, you can monitor the balance weekly and stay on track. The categories to pursue depend on your household. There’s pretty much a card for everything! For simplicity, I recommend having a general cash-back card for fixed expenses and then specializing from there. Pick two or three categories you allocate the most resources toward and find the best rewards! Often, I encourage clients to separate their discretionary day-to-day expenses, such as dining, entertainment, and shopping, onto a single card, as many are prone to overspend on these categories and lose sight of their budget. Looking for the best deal? There is an abundance of information available on the Internet about the best cards by category and current bonus offers. There are entire communities dedicated to maximizing one-time and ongoing credit card rewards. And it’s not just about miles, points, and cash back. Credit cards often include great perks like airport lounge access, streaming service or rideshare credits, free global entry/TSA precheck, and complimentary hotel services. Ultimately, the best rewards are those you seamlessly take advantage of without introducing too much hassle.
In Credit Card Debt? Here are the Next Steps!
Stop using your credit cards immediately and look for areas where you can cut back. If necessary, you may need to pick up temporary extra work. While the financial ramifications of credit card debt can be incredibly damaging, the behavioral aspect is the tougher cycle to break.
Contact a licensed credit counselor via the National Foundation for Credit Counseling. Before you can fix the debt, you have to correct the behavior.
Create a plan to eliminate the debt and stick to it! Staying on track and knowing the end game can be motivating.
Budget seriously and save a sustainable amount toward an emergency fund to reduce your chance of taking on future debt.
Call your credit card company, explain the situation, and see if they’ll pause interest charges on your card or get you on a mutually beneficial payment plan.
Determine what motivates you to keep going more between paying the highest interest rate debt vs. the smallest balance.
After successfully correcting the behavior, explore a balance transfer or loan consolidation to save interest as you repay.
