Family Finance: Credit Card Crunch

Julanne Hohbach

Credit cards are a modern convenience. They save trips to the ATM, earn airline miles or cash back and even let homeowners make recurring bill payments. Unfortunately, that ease of use can come with a price. That small piece of plastic makes it very easy to overspend, which can land cardholders in debt just as quickly as they can submit an online shopping order.

According to Experian's “State of Credit: 2017” report, Americans had higher credit scores last year but also higher balances. A typical consumer had 3.1 credit cards and an average balance of $6,354, plus 2.5 retail cards with $1,841 owed on average, the credit agency reported.

To be fair, all that debt isn't necessarily getting carried over from month to month. Some customers might make a large purchase, then pay it off, to earn rewards. Others, however, do carry a balance—and that's where things get expensive. Think of it as a loan for which the card issuer charges a steep interest rate. The more you can pay off each month, the more you'll save in the long run.

Credit card providers are required to show on each statement how long it will take to pay off your balance if you make only the minimum payment. The math can be eye-opening. Assume a cardholder has a $10,000 balance on a card with a 17 percent interest rate. Paying $250 per month will wipe the bill out in 60 months—at a total cost of $15,000, according to the calculator on Up that payment a bit to $300, and the payoff window goes down to 46 months, which saves a whopping $1,200 in interest charges. Even if you pay $1,000 every month, it would still take 11 months to pay off the debt, and rack up $1,000 in interest charges.

If you do use credit cards, whether for security, rewards or other reasons, shop around to be sure you're getting the best deal. Numerous websites compare current offers from national card companies. Be advised, though, that the institution where you bank might offer a better interest rate than the major players, so it's worth checking there, too. Don't forget to also research annual fees, late fees and the fine print.

When you pull out that credit card, you might as well get something out of the deal. Find a card with rewards you'll actually use rather than one that just racks up miles—unless you travel frequently. Some cards let customers choose miles or other perks. Do the math to see which offer would be most beneficial to you. Most rewards cards charge an annual fee, so run the numbers to see if it's worth the upfront cost.

Here are a few more tips for using those cards wisely:

  • Pay the card off every month. No balance means no expensive interest charges.
  • Don't miss payments. Pay at least the minimum amount due or the bank could impose a late fee and hike your interest rate, which will only compound your woes.
  • Financial gurus suggest keeping your credit utilization ratio—the amount you owe compared with your credit limit—to 30 percent. It's the total figure that counts, rather than the ratio for each individual card. This tactic benefits your credit score as well as your bottom line.
  • Nationwide Mutual Insurance Co. advises consumers to use credit cards for needs, not wants. Charging that emergency plumbing bill is OK as long as you pay off the expense after you get paid. The impulse buys on that trip to the outlet mall? Just say no.

Editor's note: Denise Trowbridge, who has written the Family Finance column since its debut in July 2011, has stepped away for personal reasons. Regular readers may remember her August 2017 column, in which she wrote about a kidney cancer diagnosis. The cancer has returned, and so she has decided to focus on her health and family.