Credit is easy — maybe too easy. With just the swipe of a card, you are the new owner of everything from new merchandise to great experiences. You also own the debt.
In an emergency, we may have to use a credit card. But as University of Saint Mary business professor Lisa Browning tells The Leaven, a thorough understanding of credit cards and their use can help you avoid the pitfalls of credit.
Q. Credit cards are common, but it’s easy to rack up debt. What does a credit card allow us to do — and at what cost?
A. A credit card is a way to borrow money quickly. If you have a credit card, you can use it to pay some bills that might come due. Being able to access a means to pay some bills can help you, but it’s important not to overextend your credit.
Q. Is it true that if you purchase something at the original cost and only pay the minimum payment each month, it could take you months or years to eventually pay it off?
A. Once you have a credit card, it is important to understand what your interest expense will be and ultimately what the cost of this credit will be.
For example, for $1,000 of credit card debt at an interest rate of 15%, your monthly payment would be $20. If you did not add to that balance, it would take you until July 2021 to pay off the original balance and you would have spent an additional $579 in interest. Combined, that $1,000 of debt now costs you $1,579, more than half of what you originally borrowed.
Q. In an ideal world, how many credit cards should a person have?
A. My husband and I have two credit cards and two debit cards. Debit cards are merely cash cards. You can preload them with any amount of cash. We use the debit cards at the grocery store or the pharmacy and we put money on the card before we start charging away. We typically do not use our credit cards because they involve borrowing money with interest.
Q. Many people have several major credit cards and a fistful of department store cards. Should you close most of them or just not use them? Will that affect your credit?
A. Having a bunch of credit cards can hurt your credit, especially if you are using them. Credit decisions are generally based on how many credit cards or other debts you have. The fewer cards you have, the better the impact on your credit.
Q. How do you cancel a credit card?
A. If you have a zero balance, it is easy to cancel a card. You can just cut them up and throw them away. This is not generally the case with most people, though, so it is smart to have as few credit cards as possible and manage them wisely.
Q. Assuming you can spend responsibly, what kind of expenses should you put on which kind of credit card?
A. Emergency expenditures are acceptable. For example, if someone in your family becomes ill, you may have to pay for medical treatment. It’s best to have a credit card that has a lot of credit left on it. Also, some medical providers allow you to pay as you go these days.
Q. What if you are purchasing a major appliance? Doesn’t it make sense to open a new card at that particular store so you can get the 18 months of 0% interest?
A. If you can commit to only purchasing that one item on the credit card to get the 0% interest rate, and if you have the self-control to pay off that debt before the 0% interest rate expires, then opening a credit card for that purchase makes sense.
If you do not have that level of self-control, then it does not make sense. The money-maker for the store is in the possibility (probability?) that either a) you won’t pay off the card before the 0% interest rate expires; or b) you continue to use the card and get into additional debt quickly.
Q. It is common for people to juggle balances on multiple cards. How should they pay off those balances? Is there a single formula for success?
A. Most people try to eliminate the higher cost debt first. Working on the higher interest debt helps to eliminate the debt faster.
There is an alternative that, if used carefully, can be useful — debt consolidation. If all of your credit cards can be paid off with a single card or bank loan, that approach will lower the interest you pay each month. It helps reduce the number of monthly payments and the total monthly interest that you are paying.
Q. Are there certain age groups who should be particularly wary of credit card debt, such as students or seniors?
A. Everyone should be wary of credit card debt. It can sneak up on you and wreak havoc on your finances. Seniors and students are frequently targets of less-than-optimal credit card offers.
Lisa Browning is a professor at the University of Saint Mary in Leavenworth.