I find it fascinating that some people avoid credit cards because they fear they’ll spend too much. It’s reasonable to fear debt, but if you always pay off your credit card purchases in full, you’ll save money and avoid interest charges.
“Are you serious? Let me see your wallet. You must have a credit card in there.”
“No, I swear on my family’s life. I don’t have one. No one ever told me to get one.”
“Everyone has a credit card.”
“Well, actually, I’m afraid that if I get one I’ll spend too much.”
I overheard this conversation during a recent train ride. It was between a man and a woman – a boyfriend and girlfriend, I’m guessing. I’d estimate they were both in their mid-20s. My ears perked up once I could tell they were talking about credit cards.
I found it fascinating for several reasons, not least of which was that the woman (the noncredit card holder) was wearing one of those Canada Goose jackets that retail for close to $1,000. Maybe her fears about overspending were valid!
I definitely don’t want anyone to overspend, especially since the average credit card APR is a record-high 17.67 percent. If you have the average household credit card debt ($5,700, according to the Federal Reserve) and you only make minimum payments at 17.67 percent, you’ll be in debt for 19 and a half years and you’ll end up paying $7,441 in interest. Even a more modest $1,000 debt would take five years to pay off if you only make minimum payments, and the interest would add up to $521.
See related: Want to shed debt faster? Think about the money you’ll save
Credit card debt is hard to get out of
A recent CreditCards.com survey found 56 percent of credit card debtors have been in debt for at least a year, 37 percent have been in debt for at least two years, 23 percent have been in debt for at least three years and 14 percent have been in debt for at least five years.
The most common causes of credit card debt are emergency expenses such as car repairs, home repairs and medical bills (blamed by 35 percent of people with credit card debt) and day-to-day expenses (28 percent). Discretionary purchases such as retail purchases (18 percent) and vacations (9 percent) were cited much less often.
If you already have credit card debt, you should sign up for a balance transfer card. You can avoid interest for up to 21 months with one of these cards – the Citi Simplicity Card, that charges a variable APR of 14.74 percent-24.74 percent thereafter. However, beware of transfer fees. Most balance transfer cards hit you upfront with a transfer fee ranging from 3 to 5 percent of the amount being transferred (it’s 5 percent, $5 minimum, for the Citi Simplicity).
My favorite balance transfer cards offer 15 months with no interest and no transfer fees: the Chase Slate (16.74 percent-25.49 percent variable APR after that) and the Amex EveryDay® Credit Card from American Express (12.99 percent-23.99 percent variable APR thereafter).
Late last year, we asked 1,268 U.S. adults if the following statement was true or false: If you have credit card debt, you can transfer that debt to a different credit card and pay no interest for more than a year. Just 51 percent correctly answered it’s true. This highlights a big misconception. Balance transfer cards are very real, yet not enough people know about them, and even fewer are taking advantage of them.
Information about Chase Slate and Amex Everyday cards has been collected independently by CreditCards.com. The issuer did not provide the content, nor is it responsible for its accuracy.
Should you really avoid credit cards?
I don’t like debt, but I don’t think avoiding credit cards is the right answer in most cases. I was shocked to read that 54 percent of grocery purchases are made with a debit card and 15 percent are made with cash. These people clearly have the money to buy groceries, so they should be using a credit card like a debit card and paying it off right away.
Using a no-annual-fee cash back card like the Blue Cash Everyday® Card from American Express would earn 3 percent back on all U.S. supermarket purchases (on up to $6,000 in spending, then it’s 1 percent). The average American household spends $4,363 on groceries each year, according to the Bureau of Labor Statistics, so that spending alone would yield $131 in cash back. That’s essentially a week and a half of free groceries.
It’s totally reasonable to fear debt, but I think it’s shortsighted for people like the woman on the train (and financial guru Dave Ramsey, to pick a much more famous example) to advocate avoiding all credit cards. You need to know yourself, but I think most people should be able to benefit from credit card rewards at least some of the time.
Personally, I don’t see any reason to ever use a debit card. By definition, that’s money you have available in your account right now. Put that spending on a credit card instead and earn rewards, then pay it off like a debit card before interest accrues. You’ll also benefit from stronger consumer protections and a few weeks of float.