Category Archives: Credit Cards

U.S. Credit Card Debt

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  1. Total U.S. credit card debt reached an all-time high in the first quarter of calendar year 2023, reaching $1.03 trillion, according to data released Tuesday by the Federal Reserve Bank of New York.

Rising credit card debt and auto loan balances helped to drive overall household debt levels up 1%, to $17.06 trillion for the quarter, the report showed. Overall household debt has spiked by $2.9 trillion since the end of 2019, before the pandemic.

Key facts:

  • The average American credit card debt balance is $5,910, as of the third quarter of 2022, according to Experian.
  • Americans have an average credit utilization rate of 28%.
  • Credit card interest rates have reached an average of 20.92%.
  • White Americans have the highest average credit card debt of any racial group at $6,940.
  • Higher earned income corresponds to larger credit card balances, but consumers in the middle income brackets are the most likely to have credit card debt.

References:

  1. https://www.fool.com/the-ascent/research/credit-card-debt-statistics/
  2. https://www.cnn.com/2023/08/08/economy/us-household-credit-card-debt/index.html

Credit Report and Score, and Credit Cards

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Credit is one of the most vital factors in building wealth and achieving financial freedom.

Building good credit is one of the first steps in creating an infrastructure for achieving financial freedom. Your largest purchases are almost always made on credit. People with good or excellent credit save tens of thousands of dollars on these purchases through lower interest rates and better terms.

There are two main components to your credit: your credit report and your credit score.

A good or excellent credit score can save you hundred of thousands of dollars in interest charges. Since if you have a good or excellent credit, it makes you less risky to lenders, meaning they can offer you a better or lower interest rate on loans such as mortgage loans and automobile loans.

Lenders charge you more or less for a loan depending on you score and credit history, which signifies how safe or risky you are.

Once a year, by law, you’re allowed to obtained a copy of your credit report free from the major credit bureaus: Experian, Equifax and TransUnion.

It’s important to plan now to monitor, manage and improve your credit before you need the auto or mortgage loan three to five years in the future.

And, never forget that one of the most important factors in improving your credit is getting out of debt and paying your bills on time.

Credit Cards

There has been a great proliferation of credit cards and people owning multiple credit cards over the past decade and more. And, the competition for consumers among competing credit card companies has become fierce.

Credit cards provide convenience and flexibility. And if you pay your credit card bill balance in full and on time each month, they can be utilized as a free short -term loan. They can help you track your spending much more easily than cash and you can download your transaction history.

Additionally, there are many benefits and rewards associated with credit cards such as cash back and travel rewards. But beware, most of the best rewards credit cards have annual fees. Only if you spend thousands of dollars per month on your credit card, the annual fee for the rewards might be worth it.

If you’re booking travel or eating out, use a travel card to maximize rewards, writes Sethi. For everything else, use a cash back card.

If you don’t completely pay off your credit card bill balance each month, you’ll incurred an enormous amount of interest at an high annual percentage rate (APR) that compounds.

It’s very easy to overuse and overspend with credit cards and find yourself in debt. One of the biggest problems with credit cards is the hidden cost of using them, says Ramit Sethi, “I Will Teach You to be Rich”. Many Americans have over spent and carry large credit card balances. The average credit card debt in the US in 2021, was $5,525, per Experian’s report. This was nearly 7% lower than the $5,897 in average credit card debt that was recorded in the same report in 2020.

To maximize the credit card benefits like cash-back, gift cards, air miles, discounts at the gas pump, or other rewards. And perks like free roadside assistance, free car rental insurance, or a free credit score and minimize the cost of credit cards, Sethi recommends:

  1. Pay off your credit card bill balance monthly. The single most important thing you can do to improve your credit score is to pay your bills on time. You’ll save thousands of dollars. If you miss one payment on your credit card, your credit score may drop, your APR can increase, you’ll be charged a late fee, and your late fee can trigger a rate increase on your other credit cards.
  2. Try to get fees on your credit card waived. A month before your new annual fee kicks in, call your credit card company and ask if they will waive the fee.
  3. Negotiate a lower APR. Call your credit card company and ask them to lower your APR. If they ask why, tell them that you’ve been diligently paying your bill in full on time for the last several years and there are a number of credit cards offering better rates.
  4. Keep your main cards for a long time and keep them active. Lenders like to see a long history of credit. Thus, the long you hold an account, the more valuable it is for your credit score.
  5. Get more credit. Do this only if you have no debt and you consider yourself financially responsible. You obtain more credit to improve your credit utilization rate, which is simply how much you owe divided by your available credit. Lower is preferred because lenders don’t want you regularly spending all the credit you have available. It’s too likely you’ll default and not pay them back.
  6. Use credit card’s secret perks. If you have very good credit, call your credit cards companies and other lenders once a year and ask them what advantages you’re eligible to receive. Often they can waive fees, extend credit and give you private promotions.

Call your credit card company and ask them to send you a full list of all their rewards.

References:

  1. https://www.iwillteachyoutoberich.com
  2. https://lanterncredit.com/credit-cards/average-credit-card-debt
  3. https://www.creditwww.com/Edu/credit-card-costs-and-benefits/

Federal Reserve Raises Interest Rates

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“Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.” FOMC Report

The Federal Reserve raised interest rates 50 basis points (1/2 percent) on Wednesday in an effort to tame inflation that’s soaring at a 40-year high. And, the Fed anticipates that ongoing increases in the target range will be appropriate.

The Federal Open Market Committee (FOMC) is highly attentive to inflation risks. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run.

Short-term borrowing was nudged up a half a point, and consumers are going to feel the increase in their bank accounts.With a 50 basis-point interest rate hike, you can expect higher costs for:

  • Credit Cards – Your credit card’s interest rate will likely increase slightly within a couple of billing cycles. The size of that increase can vary based on your credit score and credit card provider. A 1% interest rate increase will likely only add a few dollars to your monthly interest payments on a few thousand dollars of outstanding debt. Current average interest rates are close to 16%, but they could be as high as 18.5% by the end of the year.
  • Mortgages – Mortgage interest rates are calculated based on multiple factors, like inflation and the housing supply — but they’re also affected indirectly by the federal funds rate, which influences how much banks pay to borrow money. When that rate increases, the interest on adjustable-rate mortgages tends to follow.
  • Other loans – The federal funds rate is used to calculate the lowest interest rate offered for loans, known as the prime rate. Any loan tied to the prime rate, known as adjustable-rate loans, will likely have a slight increase in interest rates.

If you currently have a fixed-rate loan, your payments won’t change. If you have an adjustable-rate loan, you should take some time to look at its terms, says Jacob Channel, a senior economic analyst at LendingTree: “The last thing you want is to think, ‘Oh, I have a few months before my rate goes up,’ and realize that the rate hike will kick in much sooner.”

References

  1. https://www.federalreserve.gov/newsevents/pressreleases/monetary20220504a.htm
  2. https://www.cnbc.com/2022/05/04/3-things-thatll-get-more-expensive-after-the-feds-historic-rate-hike.html

Credit Report Information 101

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Your credit history is one of the factors that lenders use to assess your creditworthiness so it is important to understand what information has been reported to your credit file. 

Ancient Greek playwright Sophocles wrote, “Wisdom outweighs any wealth.” While this statement certainly rings true, it’s also true that wisdom can play a major role in building wealth—particularly when it comes to effectively managing your finances and credit.

Consumers with excellent credit scores  tend to pay less for major purchases. In short, your credit is your financial calling card, it can both open and close doors. Credit reports have also become essential tools beyond the financial world. Nowadays, your housing or employment status could be decided by your credit history; and maybe even your love life.

Thus, it is important to be prepared for anything on your horizon by understanding how your credit and credit score can impact financial progress and wealth building. The three major credit reporting bureaus — TransUnion, Equifax and Experian — maintain credit reports. The reporting companies issue credit reports to creditors, insurers and others as permitted under law for the purposes of evaluating your financial responsibility.

Tablet - 3 Bureau Reports & Scores

Here is an example of how the system works:

Apply for a Credit Card – When you apply for a new credit card, the creditor requests a copy of your financial history, or credit report, from one or more of the credit reporting companies.

The Creditor’s Assessment – The creditor may use your credit report, a score, and other information you provide (such as income or debt information) to determine whether to approve your application and what rates to offer.

The Creditor’s Decision – If you are issued a card, the creditor reports that account to the credit reporting companies, and then updates it, including your balance and payment activity, about every 30 days.

Your Credit Profile Updated – The credit reporting companies update your credit report as they receive new information from creditors and lenders. Your credit profile changes based on your financial activity. The next time you apply for a credit card or loan, the process repeats.

Managing Your Credit Report

Your report is divided into six main sections. When you open a new account, miss a payment or move, these sections are updated with new information. These sections are:

  • Identifying Information (name, address, birth date and Social Security number)
  • Employment
  • Consumer Statement
  • Account Information
  • Public Records
  • Inquiries

Negative records – Late payments create a negative record. Generally, negative records will stay on your report for up to 7 years (up to 10 years for certain bankruptcy information). Positive records can remain on your credit report longer.

Your Credit Report is updated in most cases every 30 days – Your credit report is updated with new information reported by your creditors. Most creditors report new information approximately every 30 days, to reflect your account balances and payments you make.

Check every 6-12 months – Not all creditors report to all three companies; the companies obtain their data independently, so your credit reports from TransUnion, Equifax and Experian could substantially differ. That’s why it’s important to check your three credit reports every 6-12 months to ensure that the information is accurate and up-to-date.

Check Your Credit Report regualarly…checking your own credit will NOT harm it.

Correcting inaccuracies – Under the Fair Credit Reporting Act, consumers are protected if there is inaccurate information on their credit reports. If you find inaccurate information on your credit reports, you can contact the associated creditor or lender directly. You can also dispute the inaccuracy with the credit reporting companies.

Know the system – Managing your credit and maintaining a good credit history can lead to better rates on major purchases. It’s recommend that you check your credit reports every 6-12 months, or at least 3 months before a major purchase, in order to identify potential inaccuracies and any signs of identity theft.

Routine check-ups, along with paying your bills on time, keeping your credit card balances below 35% of their limits, and correcting any inaccuracies will help ensure your credit reports are viewed in the most favorable light.

Finally, if you believe you’re a victim of fraud, you can activate automatic fraud alerts and the credit bureaus will place an initial alert on your credit report. This alert encourages lenders to take extra steps to verify your identity before extending credit.

References:

  1. https://www.creditonebank.com/articles/10-famous-quotes-about-finances-credit

BNPL – Buy Now, Pay Later

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According to Worldpay’s 2020 Global Payments report,“buy now pay later” is the fastest growing e-commerce payment method.

The idea of buying a product now that is beyond your budget and that to pay for that product later in many ways sounds too good to be true.   However, this is possible by an innovative digital online payment option called Buy Now Pay Later (BNPL).

BNPL is a form of short-term financing the helps consumers make purchases with a small down payment and wait to pay for the rest of the balance at a later date.

Buy now, pay later is becoming an increasingly popular way for people to shop, particularly online, since oftentimes these plans don’t charge interest and are much easier for consumers to get approved for than traditional loan methods.

Customer gets the flexibility to choose suitable installment payment options, which will spread over a certain span of time. Absence of any interest cost and strict approval requirements makes BNPL a sought-after, convenient payment option, especially for millennials .

In North America, “buy now pay later” market share is expected to triple to 3% of the e-commerce payments market by 2023.

In other regions, such as Europe, the Middle East and Africa (EMEA), “buy now pay later” already accounts for almost 6% of the e-commerce payment market and is projected to reach nearly 10% by 2023.

Win-Win Bid for all Parties

BNPL is a win-win proposition for all the parties involved in a transaction, such as the consumer, merchant as well as the issuing bank:

  • The consumer gets the option to buy stuff that was his layaway target.
  • The merchant gains from more customers and better conversion, higher order value, rise in the repeat purchase rate and more benefits.
  • The issuing bank profits from elevated spending.

The major BNPL players are U.S. PayPal, Canadian Affirm Holdings, Swedish Klarna, and Australian Afterpay.  Each of these companies already boasts a big customer base comprising millions of merchants and customer accounts.

References:

  1. https://www.nasdaq.com/articles/buy-now-pay-later-solution-catching-up-fast%3A-3-stocks-to-gain-2021-05-20
  2. https://www.marketbeat.com/originals/add-these-buy-now-pay-later-stocks-to-your-shopping-list/

Five Money Goals to Financial Wellness | TIAA

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According to TIAA, there are five big financial goals anyone seeking financial well-being should include on their list:

  1. Max out your 401(k) / 403(b). One rule of thumb says that by the time you turn 30, you should have the equivalent of your annual salary saved (that’s all savings, not just retirement assets); double your salary saved by age 35; three times the amount by age 40. And, it’s essential to take full advantage of your employer match, if you have one: With a $50,000 salary from an employer matching up to 6% of your contributions, you’d be turning down $3,000 (free money) each year! Letting your employer match go to waste would be like you accepting a $3,000 pay cut without a fight. In the absence of an employer plan, contribute to an IRA instead, even though the target is much lower (the annual contribution rate for 2021 is $7,000.
  2. Build an emergency fund. Each year brings economic uncertainty to many and, even for the financially secure, life happens in the form of medical bills, domestic catastrophes and other unplanned expenses. As a general rule, it’s good to maintain an emergency fund that would cover three to six months of living expenses in case you find yourself unemployed. Once you’ve calculated how much you should save, set aside a certain amount from each paycheck to set you on your way.
  3. Get your financial affairs in order. Estate planning is something you can’t afford to ignore. Getting your financial affairs in order, and designating the right people to manage them in the event of your incapacity or death, takes a huge weight off your shoulders. Necessary documents include durable powers of attorney, which designate someone to manage your day-to-day affairs, and a living will or healthcare directive to instruct your doctor what to do if you’re unable to make medical decisions for yourself. Don’t forget to inform those assigned with the task of handling your estate, who need to know the location of your will and other estate planning documents.
  4. Give yourself a debt deadline. Bad debts. You know which ones they are: the loan you took out to pay for a wedding; the credit card with the sky-high interest rate whose balance keeps rolling like a New York subway car. Convincing yourself that minimum monthly payments are okay? How about setting a deadline for repayment and getting rid of this exponentially growing interest?
  5. Create a budget (and stick to it). If you find that your spending is a bit out of control, you may want to press the reset button on your out-of-control spending behavior with a budget.

Setting these five money goals is enough to start you well on your way toward financial well-being.

References:

  1. https://www.tiaa.org/public/learn/personal-finance-101/5-must-have-financial-goals

True Cost of Credit Cards

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Credit cards make buying things easy, but at a significant cost

Credit cards provide security, convenience, and even rewards based on spending. However, if cardholders don’t manage their cards carefully, they may find themselves facing unwanted consequences like a poor credit score or hidden fees.

If you don’t pay off your credit card balance every month, the interest assessed on your account means you may be paying more than you expect. And if you spend beyond your means, the resulting interest and debt can become significant.

Pros and Cons of Credit Cards

To make the most of your credit cards and maintain a great credit score, it’s essential to understand their pros and cons. Maximize the benefits and minimize unnecessary costs by learning about the advantages and disadvantages of credit.

Advantages

  • Instant Purchasing Power – Credit can help with unexpected emergency expenses and give you the flexibility to pay them over time.
  • Security – Lose cash, and it’s gone. Lose a credit card, and it can be canceled with no harm done in most circumstances. Also, you need to be prompt about reporting a lost or stolen card to be protected against its unauthorized use.
  • Record Keeping – Your credit card statement is an itemized list of your monthly expenditures, which can be helpful when it comes to budgeting.
  • Convenience – Credit cards are more widely accepted as a form of payment than checks, and they’re generally faster to use.
  • Bill Consolidation – Bills can be paid automatically via credit card, consolidating several payments into a single sum.
  • Rewards – Using a credit card with a rewards program may earn you benefits like free travel.

Disadvantages

  • The main disadvantage to credit card usage is the potential cost in interest and fees. Wise use of credit means understanding those costs and acting accordingly. Keep track of your spending to ensure that you can repay your credit card bill in full when it is due each month.

It’s important to understand the true cost of credit cards when interest and fees are factored in. Using credit may be less convenient if it means paying more for purchases over time when interest is factored in.

Payment by credit card is quite different from the cash payment methods like cash, check, or debit card. With credit, a promise to pay later is a part of the transaction. With credit cards, credit is provided by a third party (someone other than the seller), the seller receives full payment for the item. The seller must pay money back to the third party who provided the credit. In this way, the person receiving the credit is delaying payment.

Many people use credit to pay for meals at restaurants, even to make small purchases without having to use cash. Because the use of credit is so common, it might appear that credit is unlimited. However, people who do obtain credit are subject to credit limits, meaning that they can only get so much credit.

Get to know these credit cards terms:

  1. Annual Fee – The once-a-year cost of owning a credit card. Some credit card providers offer cards with no annual fees.
  2. Annual Percentage Rate (APR) – The yearly interest rate charged on outstanding credit card balances.
  3. Balance – An amount of money. In personal banking, balance refers to the amount of money in a savings or checking account. In credit, balance refers to the amount of money owed.
  4. Credit Line – The maximum dollar amount that can be charged on a specific credit card account.
  5. Grace Period – The period of time after a payment deadline when the borrower can pay back the borrowed money without incurring interest or a late fee.
  6. Introductory Rate – An interest rate offered by credit card issuers in the initial stages of a loan. These rates are often set much lower than standard rates in order to attract new cardholders. Make sure you know how long the introductory rate will last and what the standard interest rate will be once the introductory period ends.
  7. Minimum Payment – The minimum amount of money that you are required to pay on your credit card statement each month in order to keep the account in good standing.
  8. Overdraft Protection – A banking service that allows you to link your checking account to your credit card, thereby protecting you from overdraft penalties or bounced checks in the case of insufficient funds.

Credit cards can be a convenient and flexible form of payment, but they have to be used responsibly in order to make the most of your money. Though credit cards allow you to purchase items instantly without using cash, it’s important to use your cards as carefully as you would handle your cash.

References:

  1. https://www.practicalmoneyskills.com/learn/credit/credit_basics
  2. https://www.econedlink.org/resources/the-costs-of-credit
  3. https://www.thebalance.com/the-true-cost-of-credit-cards-1289627
  4. https://www.practicalmoneyskills.com/learn