Mary-Conner-PoolAs my law partner pointed out recently, new data released by the Federal Reserve shows that credit cards debt has reached over 1 trillion in the United States.  This is the highest it has been since before the recession in 2008.  Creditcard.com states that the average consumer in America owes approximately $9,600 in credit card debt.

A recent creditcard.com survey found that consumers are using credit cards for making smaller purchases in 2017.  Out of 674 cardholders surveyed, 17% were using the credit cards to make purchases of $5 or less, which is an 11% increase from the 2016 survey.  I suspect that the reason there is an increase in smaller purchases is because of the rewards/perks being offered by credit card companies if you shop a particular locations or spend a specific amount in a specific category.  For example, some credit card companies will give you 5% cash back when you use your credit card to buy gasoline.  The credit card companies will pay you money if you use these types of credit cards to make specific purchases.

Using credit cards that offer rewards or cashback

The two major disadvantages of using your credit card to make smaller purchases for the rewards are:  1) it only benefits you if you have the ability to pay off your credit card balance each month, and 2) consumers tend to spend more when you using plastic instead of cash.  If you are paying interest each month on the credit card, the rewards you receive will never be enough to offset the interest you have paid.  If you are spending more money because you are using a credit card then that defeats using the card for the rewards.

If you are good at saving money, then my advice would be to only use a rewards credit card to pay your fixed monthly household bills (i.e., utility payments, life insurance, car payments, etc.) and pay the balance off each month with your income.  If you are using the credit card this way, you will avoid paying interest/fees and have the credit card company giving you a reward for using its card.  It is essential that you are able to pay off the balance every month though for this to work to enable you to make money from the credit card company.  Remember, the credit card companies are banking on the fact that you will at some point have to maintain a balance and it will then be able to earn money from you through interest and fees.

How to credit card companies make money?

Credit card companies start as early as college trying to get consumers to obtain credit cards.  These companies profit mostly in three ways:  interest paid by you, fees charged to you and transaction fees paid by businesses to accept credit cards.

Interest

This is the amount of money you pay to the credit card issuer when you carry a balance on your credit card.  If you pay the entire balance of your credit card off by the due date each month, you will avoid paying interest.

Fees

Some of the common fees charge to you can include:

  • Annual fees: a fee that you pay once per year for the use of a particular credit card.  If you are paying an annual fee, ask yourself whether the benefits of having that card is worth it.  According to a recent creditcard.com survey, only 24 out of 100 credit cards reviewed charged an annual fee,
  • Late payment fees: this is a fee assessed to you when you pay after the due date, and
  • Over-the-limit fees: this is a fee assessed to you when you exceed your credit limit on your credit card.

Merchant Fees

These are fees assessed to businesses for the business to be able to accept a particular credit card.  Usually these fees are a percentage of purchase price.

If you are overwhelmed with credit card debt or not seeing your balances go down, give one of our offices a call today to schedule a free consultation to discuss your options in getting a fresh start and how you can get out of debt.

 

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