November 15th, 2018
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Responsible Credit Card Ownership
Responsible Credit Card Ownership
According to a 2011 study by the Journal of Consumer Research, how we choose to pay at the register has a measurable effect on our temporary brain function. Study participants who purchased goods with a credit card were much more likely to have less recall of the transaction, and were even shown to be more focused on the product's benefits than on a more balanced cost-versus-benefit analysis. In addition, those who paid by credit card were less likely to have a clear understanding of their spending habits, than those who paid by cash.
Credit cards, however, are a fact of life. It is well known that most individuals tend to overspend, and raise their card balances to an unsustainable level. However, we understand knowledge is power, and that it can be difficult to wade through all the available information on responsible credit card ownership. As a result, we felt our readers would benefit from a quick outline of the responsible credit card ownership basics.
Understand Your Contract
A credit card contract, also known as a credit card user agreement, is a legal document that outlines the terms and conditions of your specific arrangement with the lender. A credit card contract will include information on your account's interest rate, repayment terms, as well as your credit limit, and how your personal information can be shared.
Because a credit card contract contains a lot of legal jargon, and can entail several pages of very small text, it may be difficult to understand exactly what you're agreeing to. However, since you're entering into a legally binding contract, it is always suggested that you directly contact the company prior to signing it, should you have any questions or concerns.
Here are a few credit card contract details you should pay close attention to:
- What is my annual percentage rate (APR)?
- Is my APR set at a fixed rate indefinitely, or will it increase after a certain period of time?
- What will my APR increase to if a negative mark appears, such as a late payment?
- What is my credit limit?
- Is there a minimum finance charge?
- What changes can the card issuer make to my account?
The above represents but a short list of questions you'll likely need to be asking when reviewing a new credit card contract. But always remember that staying informed about all the different aspects of your card agreement is one of several steps toward responsible credit card ownership.
Monitor Your Spending Closely
As noted by the Journal of Consumer Research study, it can be easy for credit card debt to quickly spiral out of control. As a result, monitoring your spending should be your highest priority when working toward responsible credit card ownership.
According to June 2012 credit card statistics from the U.S. Federal Reserve, the average American household has more than $15,000 in total credit card debt, with a total revolving countrywide debt of more than $864 billion. In other words, it's clear that most of us eventually fall into the trap of credit card overspending, whether it's due to an unplanned emergency, or simply a lack of willpower.
Ideally, any debt you owe should be paid in full when you're billed, though a solid general rule of thumb is to not have more than 30% of your credit limit tied up in debt at any one time. Also, if there are multiple cards you don't use, cancel those accounts, and if you have more than four active cards, try and whittle them down.
However, these steps can only be taken after keeping a close eye on exactly what you're charging to your account.
Pay Your Bill on Time
Once you have your overall credit card spending under control, it becomes much easier to pay your bill on time, because you no longer have to worry about running over your card limit, or finding yourself unable to afford the minimum monthly installment.
Most credit card companies offer the ability to pay online, and several lenders can even withdraw the monthly bill directly from your bank account, helping you to never be subjected to a late payment. Paying your credit card bill in a timely manner offers many benefits, including avoiding late fees and penalties, having your annual percentage rate decreased, as well as obtaining a higher credit rating, since you've proven yourself to be a good credit risk.
Avoid Cash Advances
Cash advances occur when you withdraw cash from your credit card, much like you would at an ATM. The amount of cash you withdraw will then be added to the balance of your credit card. What most consumers fail to understand is that credit card cash advances are not handled in the same manner as a traditional goods or services-based purchases.
To begin with, credit card cash advances are typically subject to an immediate convenience fee of anywhere from $10 to $20, according to the Association of Independent Credit Card Counseling Agencies. This means, if you withdraw $100 cash from your credit card, you will immediately owe $110-120 back to the bank. If you have to take out a credit card cash advance for a one-time emergency, this may not hurt you in the long run, but if you do this on a regular basis, it can quickly add up.
Next, credit card cash advances carry, almost universally, higher interest rates than for standard purchases. Again, according to the Association, cash advance interest rates average between one and seven percent higher than direct purchases. On top of this, any payments you make to the credit card company are typically applied to the lowest interest balance first, which means that if your balance is high, you could be paying on your cash advance well into the future.
Lastly, if the financial institution offers any grace period for standard purchases, it will very likely not be available with cash advances. This means your account will begin accruing interest charges immediately after withdrawing cash from your credit card.
All in all, unless a dire emergency presents itself, most experts would recommend against ever withdrawing cash from a credit card. The interest rates are much higher, the fees can make a huge impact on your ability to repay, in addition to the fact cash advances rarely carry the same advantages as standard purchases.
How Do I Become a Responsible Credit Card Owner?
The above suggestions are just the tip of the iceberg when it comes to smart financial responsibility, but should be more than enough to help you begin your journey. We understand most people are excited about the prospect of becoming viewed as a responsible credit card owner, and reaping the many benefits thereof.
However, keep in mind that the process is not a quick fix. Depending on your financial status, it take often take years to become a responsible credit card owner; whether you're a college student looking to establish credit, or a retiree looking to maintain your years of good standing.