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Credit cards – the good, the bad and the ugly

Americans are in debt more then ever. While credit cards can make your life easier, beware of the dark side of never ending debt.

Americans have a mountainous credit card debt

According to a LendingTree statistical survey, the amount of credit card balances has increased by $121 billion since the third quarter of 2021 to a whopping $925 billion. That is a 15% gain, the biggest annual increase in more than 20 years.

With the increase, the amount of credit card debt held by Americans is now just $2 billion less than the previous high. This high was established in the fourth quarter of 2019 when balances were $927 billion. It won’t be long before credit card balances reach the 2019 high due to rising interest rates, persistent inflation, and a plethora of other economic issues.

According to LendingTree statistics, New Jersey residents have the highest average credit card debt of any state. On the other hand, Kentucky residents have the lowest average credit card debt.

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The three lowest debt states were found in the South, while the four states with the highest debt were all on the east coast. The balances between the states at the top and bottom of our rankings were significantly different. New Jersey cardholders owing $7,872 and Kentucky cardholders owing $5,441. Accordingly, the average balance in New Jersey is 45% larger than the average balance in Kentucky.

In the third quarter of 2022, the average annual percentage rate (APR) for all credit cards was 16.27%. In the third quarter of 2022, the average interest rate for credit cards was 18.43%. The average rate for new credit card offers is 22.91% right now, the highest since the survey started in 2019.

The Fed’s most recent delinquency statistics – the 30-day delinquent rate, increased from 1.85% to 2.08% in the third quarter of 2022. This is the number of customers who are now at least 30 days late with their credit card payment. During the great recession delinquencies peaked at about 7% in 2009. 

How to deal with growing rates and taking care of your credit

Perhaps not surprisingly, as inflation took prices up more than 8% from a year ago, balances are growing. This is why paying off credit card debt is harder than ever.

There is a clear link to the Fed’s benchmark because the majority of credit cards have a variable interest rate. The prime rate and credit card rates increase in tandem with an increase in the federal funds rate. The effect is often felt by cardholders within a billing cycle or two.

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The greatest action you can do right now is use a 0% balance transfer card to pay off high-interest debt. Here are some tips on how to avoid some of the biggest mistakes with credit cards:

1.Paying a bill after its due

A late payment may result in severe repercussions. You can start off with $35 in late fees and a prospective interest rate increase. The three major credit bureaus – Equifax, Experian, and TransUnion may add a late payment mark to your credit record if your payment is more than 30 days overdue. This mark might stay on your credit report for seven years. Your ability to build or keep good credit may be impacted by this.

If you frequently forget when something is due, you might want to set up automated payments or create a reminder on your phone. You could ask your card issuer for a new due date that better fits your payment schedule if a shortage of finances is keeping you from paying your bill on time.

2.Maxing up your credit cards

For a variety of reasons, maxing out your credit cards is a risky financial habit to develop. Of course, using all of your available credit may make it more difficult to pay off your debt and may result in high interest rates. Your credit may also suffer.

Overusing your credit cards lowers your score since it has a negative impact on your credit usage ratio. This is the proportion of your available credit to how much you have already utilized. Get into the habit of never charging more than 30% of your credit limit. Ideally, maintain your ratio even lower than that if you want the finest credit score possible.

3.Only paying the minimum amount due

It’s kind of like kicking the can down the road when you merely pay the minimal amount due on your credit card. Every time you can, pay more than the required minimum. To avoid carrying a debt, it is important to pay your account in full each month. By paying as much as you can each month, you’ll minimize the amount that will roll over to the next month and pay less interest. You’ll be shocked at how fast that little bit extra can build up.

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Shopping without a strategy to pay your card off before the conclusion of a billing cycle is far too simple. It is also exactly how you accumulate debt. Make a budget for yourself so you know what you can and cannot afford in order to prevent incurring excessive debt as a result of a shopping binge.

4.Obtaining payday loans – cash advances

Although obtaining a cash advance is quick and simple, it probably isn’t worth the convenience. Cash advances sometimes carry a higher interest rate than ordinary purchases from many card issuers. Additionally, unlike the grace period that issuers provide for purchases (as long as you don’t have a debt), a cash advance does not come with a grace period for repayment.

And if that weren’t enough, you’ll probably have to pay a one-time cash advance charge, which is normally approximately 3% of the cash amount. Therefore, if you receive a $400 cash advance, you will be charged $12 as a fee for the privilege. You should never pay yourself before you pay your bills.

The conclusion

There are many benefits to using credit cards responsibly, and being aware of the aforementioned risks can help you manage your credit cards properly. An occasional mistake, such as using your gas card at the grocery shop or simply paying the minimum one month, won’t ruin your financial situation. However, it’s crucial to prevent continuing to use your credit card incorrectly.

Tomáš is a financial reporter with US markets as his main field. Tomáš is an aspiring author and entrepreneur aspiring to help people get better in financial knowledge.

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