Are credit cards inherently evil? I do not think so. Yet, that being said there are two golden rules for credit cards:
- Pay your credit card(s) on time
- Pay your monthly balance in full
Those seem like two simple rules but those two rules are often broken. This can lead to debt and sometimes substantial debt. Credit card companies do not want you to pay your balance in full because that is how they make crazy money. Most credit card interest rates are notoriously high.
Credit Card Interest Rates
The simple definition of interest is the price you pay for borrowing money.
Credit cards typically use an annual rate known as the annual percentage rate or APR. Credit cards use this interest rate to calculate the interest charged during your monthly billing period.
In order to determine how much interest you will be charged you will need to know three things:
- Your APR
- Your average daily balance
- The number of days in your billing cycle
To calculate your interest charge:
- APR divided by 365 (days in the year) gives you your daily periodic rate
- Multiply the daily periodic rate by your average daily balance on your credit card
- Multiply that number by the number of days in your billing cycle
You can play with the numbers and see how quickly debt can start to build if your credit cards are not paid timely and/or carry a balance.
Also, read the fine print on the credit card company’s website when you apply for a credit card. Know if the APR is fixed or variable. Many variable interest rates start with the Prime Rate and add an additional margin.
Some companies will increase your interest rate if you are 60 days or more late on your payment. Additionally, Credit card companies charge a late payment fee and these can be quite hefty.
Late Payments Negatively Affect Your Credit Score
Also, late payments are the number one factor that negatively affects your credit score. Your payment history accounts for 35% of your credit score. For more information on how your credit score is calculated click on this Wells Fargo article:
So What Are The Pros?
I have three credit cards that I use and every year I gain from them. Before I explain, let me go back in time and share my first credit card experience.
I had recently arrived in Miami to begin my junior year of college at Barry University. I was a transfer student from Connecticut. Although I was beyond excited to be living in Miami, I knew I would want to fly home for visits. During class registration, I saw an American Express booth set up on campus. What was American Express offering as their college student hook? Two $99 round-trip airline tickets. I was in. I applied for my first American Express credit card, got it, and flew home twice for a total of $198.
Yes, credit cards can have some excellent benefits and rewards but an eyes-wide-open responsible approach to credit card use is necessary to reap the benefits and not get stuck in the muck of debt, late fees, and falling credit scores.
I travel often, it is one of my passions, so besides American Express, I have an American Airlines MasterCard and a Marriott Visa. Yes, I pay an annual fee for each card but every year, for me, the benefits and rewards I receive outweigh the fees.
Marriott gives me a free hotel room certificate once a year- that alone is more than my annual fee. My American Airlines card gives me and my travel companion free checked baggage- that usually more than covers my annual fee. My American Express card gives me a free Delta Airlines companion ticket every year and just paid for my Global Entry and TSA Pre-Check- again the benefits I received exceeded the cost of my annual fee.
Additionally, I receive:
- Extra airline and hotel points on my purchases
- Extended warranties on many items I buy with my credit cards
- Great deals on rental car and baggage insurance
- Loss and Theft Protection on items
- Upgraded Travel Status
I could list multiple other benefits and rewards. I follow the two golden rules: I pay my credit cards on time and I pay the statement balance in full every month. It is the no-interest payments that allow me to come out ahead of the credit card companies.
Credit card companies are not banking on people like me. Credit card debt in the United States is staggering and credit card companies are in the business of making money.
I don’t believe credit cards are inherently evil and they can actually have some great benefits. Yet, if not paid timely and in full the debt can grow rapidly and weigh you down. This leads to money stress and anxiety which is neither a reward or a benefit.
For now, I will sign-off by saying tread cautiously with credit cards. If you do get a credit card, do your research and get one that fits your needs. Do a cost analysis to determine if the annual fee is less than the monetary value of the rewards and benefits. It should be. And remember the two golden rules.
Susan Howell, The MoneyMaestra