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Getting the Most Out of Your Credit Card

Guide published by Joelle Jacinto on November 25, 2019

Supermarket shopping.

Are you thinking of getting a credit card? Read this first to avoid the trap of credit card debt.

Credit cards have such a bad reputation for putting people in inescapable debt, especially when it seems every American is struggling to meet their monthly payments. According to Bloomberg, there are 480 million credit cards currently in active use, a 100 million increase from the pre-recession peak in 2008. Despite debt growth of around $68 billion, the use of credit cards persist because, well, they are useful, and quite irresistible, to be able to buy things you need without worrying about immediate cost.

Did You Know?

According to the New York Federal Reserve, at the close of Q3 of 2019, credit card debt in the United States totalled to $1.08 trillion, surpassing the record high of July 2008's $1.028 trillion. In effect, the average American household then owes $8,398 on their credit cards, which is a cause for concern, as a significant number of credit card owners spend more money than they make, continuing a cycle which may leave them in debt forever.

Even though, as of 2019 Q2, credit card debt actually only makes up 7.79% of total consumer debt of $13.86 trillion, and is only one of four major debt areas that contribute to the total, credit card debt may be seen as the riskiest and most problematic debt to overcome, compared to the other debt types, which are mortgages, auto loans and student loans. This is because credit card debt is an unsecured, revolving debt, which may appear easier to pay off, but actually, unlike mortgages or student loans, grows over time.

Unsecured versus Secured Debt

Despite being a much smaller debt than mortgages ($1.08 trillion against $9.83 trillion from mortgages, 2019 Q3 – data taken from the Federal Reserve Bank of New York's Household Debt and Credit Report Q3 2019), acredit card debt is more difficult to pay off than a mortgage, and may take much longer. Credit card debts have a high interest rate because they are unsecured, while a mortgage is a secured debt, where a requirement of the debt is collateral security.

Collateral is a guarantee, a physical property that is pledged to the lender in case the borrower is unable to pay off the debt. When you buy a house, the house itself, in the form of the deed or land title, is typically set up as collateral. If you are unable to pay the full mortgage by the specified deadline, the house is seized by the bank. However, it should be easier to pay off a mortgage or an auto loan than a credit card debt because the installments made on the house or car are usually structured as fixed payments, always the same amount that was agreed on from the beginning of the loan.

House for Sale.

The rise in mortgage debt is not necessarily bad news for Americans, which indicates that the housing industry is recovering from the recession in 2009. Indeed, mortgages are seen as good debt, because the house or property that the mortgage is taken out on typically gains value as the mortgage is paid off. The investment on the house appreciates most years, and even if it only does so at 3%, the value of the property will double in 24 years.

In contrast, credit card debt is an unsecured debt because of the absence of collateral. As there is no guarantee that the borrower can pay the lender back, a high interest rate is charged on top of the principal loan amount. Moreover, this interest rate is a variable rate, and it changes due to several factors. As credit card delinquency has increased over the years, with currently 37 million credit accounts marked as delinquent by over 90 days, as reported by Bloomberg. Consumers with poor credit scores may require using a secured credit card, where the borrower makes a cash deposit to act as collateral on the card, to help limit creditor risk as consumers with low credit scores rebuild their credibility.

Interest Rates by Debt Type

The following table highlights recent interest rates across multiple financial products as of November 21, 2019.

Loan Type Classification APR
5-1 adjustable-rate mortgage (1) secured by home 3.39%
15 year fixed-rate mortgage (1) secured by home 3.15%
30 year fixed-rate mortgage (1) secured by home 3.66%
new auto loan with great credit (2) secured by vehicle 4.19%
used auto loan with great credit (2) secured by vehicle 4.69%
48-month new car loan (3) secured by vehicle 5.27%
60-month new car loan (3) secured by vehicle 5.27%
new auto loan with bad credit (2) secured by vehicle 14.88%
used auto loan with bad credit (2) secured by vehicle 19.62%
24-month personal loan (3) unsecured 10.07%
Credit Cards    
low interest (4) unsecured 14.16%
balance transfer (4) unsecured 15.05%
average rate charged on credit cards (3) unsecured 15.10%
business (4) unsecured 15.12%
airline (4) unsecured 16.90%
rewards (4) unsecured 16.96%
average rate charged on credit cards assessed interest (3) unsecured 16.97%
student (4) unsecured 17.23%
cash back (4) unsecured 17.13%
average (4) unsecured 17.21%
instant approval (4) unsecured 19.65%
bad credit (4) unsecured 24.93%

Table sources:

  1. Freddie Mac PMMS - November 21, 2019
  2. Experian State of the Automotive Finance Market Q4 2018
  3. Federal Reserve Consumer Credit - G.19 - August 2019
  4. - Nov 20, 2019

What is a Good Credit Score?

The following table shows FICO credit score data from Experian, along with the impact it has on a borrower.

Range Rating Population Credit Impact
300-579 Very Poor 16%

Applicants may not be approved for credit, or they may be forced to pay a fee or deposit to access credit.

580-669 Fair 17%

Subprime borrowers.

670-739 Good 21% Roughly 8% of borrowers are likely to become seriously delinquent.
740-799 Very Good 25% Likely to receive lower interest rates for good credit.
800-850 Exceptional 21% Can access the best rates available.

The Overwhelming Revolving Debt

Using a credit card to make a purchase allows you to pay for it at a later time, providing a grace period of ideally 30-45 days. If you are able to pay for it in full when you receive your bill, you have cleared your debt and are using your card responsibly. If you leave a balance on the card, this and any purchases you make with the card in the next month are subject to an interest rate that is based on your credit score. Then you are no longer paying for only the original purchase, you are also paying interest. A balance which rolls over into the next billing cycle makes this a revolving debt.

Credit Card Payments.

Non-revolving debt has a fixed payment term, where the loan should be paid off by a definite date, and a fixed rate, or the same interest rate for the entire duration of the loan. Revolving debt has a variable interest rate, based on the actual balance of the loan and the annual percentage rate of interest (APR). The APR is the rate of interest that is charged on the loan, it may be fixed or variable according to the kind of loan involved. With credit cards, the APR is variable.

Consumers who only make minimum payments on their credit card bill will spend a lot on interest as even a small amount of debt can take many years to pay off. People who fail to make even a minimum payment also incur fines and, more importantly, get hit with higher interest rates. As the debt continues to revolve in this manner, freeing yourself from debt may seem to take forever, and perhaps even impossible to overcome.

So Why Do Consumers Love Their Credit Card So Much?

Wallet with Credit Cards.

Americans feel attached to their credit cards, with each individual owning an average of 4 cards, but concede that it is actually a love-hate relationship because of the challenging responsibility of maintaining them. Still, there are many benefits to using credit cards.

  • Emergency Buffer: Credit cards are mostly used to make ordinary purchases, but are valued as a form of security for emergencies, as many consumers have limited savings set aside for emergencies.
  • Convenience: Consumers find convenience in not having to carry cash on their person, especially when buying expensive items or traveling internationally.
  • Track Spending: Consumers also find convenient having a documentation of purchases and transactions, in the form of the credit card bill, to help them track their spending habits & manage their budget.
  • Rewards Programs: Credit cards also have rewards programs for their users, to encourage frequent use. Some users get cash back while others obtain high end electronics or discounts on flights.
  • Grace Periods: Consumers can avail of cash advances and, for delinquent users, an easier way of clearing their debt with balance transfer debt consolidation, wherein you can use a different credit card, with a lower APR or zero interest grace period, to pay off the debt on your first card.
  • Purchase & Fraud Protection: Using a credit card to make a payment also protects the consumer, as the payment is not sent immediately. So in the case of a scam or sales fraud, the consumer can simply cancel the payment with their credit card company.

Different Types of Credit Cards for Different Uses

If you are thinking of getting a credit card, you should first decide why you need one and what you plan to use it for. Many people have specific uses for their cards – some use it primarily for travel expenses, such as booking flights or paying for gas, while others use it mostly to buy groceries, while others use theirs for all kinds of purchases possible.

There are many kinds of credit cards available for different consumer needs:

  • Traditional Cards – This is the standard credit card type and the most popular, as they are accepted nearly everywhere, especially Visa, Mastercard, American Express Card & Discover.
  • Rewards Cards – These offer bonus rewards for each purchase, which is a great incentive for consumers to spend their money. Rewards can come into a point system that either offers discounts or free items or cash backs on future spending, but you should be wary of annual fees, higher interest rate and low credit limits.
  • Retail, Gas & Airline Cards – These cards operate like Rewards cards but are specific to certain products or retailers and cannot be used diversely like traditional cards. Retail Cards or Store-specific credit cards are used only for the store that issues it. These are very popular because of the discounts offered on each purchase. Gas cards can only be used in the stations of that one gasoline chain, while Airline cards work only when you book flights with that specific airline. Using your Airline card constantly will also offer specific benefits and bonus rewards, while racking up your miles.
  • Premium Rewards Cards – Premium cards are for high spenders who manage to pay their credit card balance on time. The rewards offered with this card are premium as well – special concierge services at 5-star hotels and VIP airport lounges, travel insurance and waived international transaction fees, even free flights or hotel buffet dinners. The annual fee of this kind of card is premium as well, as it can go as high as $500.
  • Balance Transfer & Low Interest Cards – The reason why Americans have more than one credit card is usually because they are trying to pay the first one off with the second one. This is known as debt consolidation. These cards offer zero-percent interest for a prolonged number of months for the purpose of clearing the debt of the first card. Low interest cards are also used for this purpose, but the low interest rate usually expires after the first few months.
  • Secured Cards – As mentioned earlier, secured cards are backed by a cash deposit that acts as collateral to keep the interest rate low. This card helps delinquent consumers to improve their credit scores, as well as those who are unable to qualify for a traditional credit card because they have no credit history. A cash deposit of $200 – $500 is made as an asset to the card and secure the card against any debt. The credit limit of the card is usually the amount of the deposit used as collateral.

Travelers in Airport Lounge.

Find The Most Suitable Interest Rate

Your second concern in choosing a credit card is to find one with interest rates or APR that your personal budget can afford. Credit card companies are supposed to present the APR of a card as soon as a consumer shows interest in acquiring one, for them to compute whether they are able to sustain credit card expenses. Many however do not know what the APR means and possibly get a card that is not suitable for their needs. If you already have a credit card and you are not aware of what your APR is, it is usually indicated on your billing statement; otherwise you can call your card issuer and ask them.

You can use the above calculator to help you compare credit cards based on the APR of both cards and how much you can pay on your card on a monthly basis. This allows you to estimate costs of the different credit cards, or even using multiple cards at once, to let you decide which card suits your finances better.

You can also use the above calculator to appraise how long before you can fully pay off your balance, how much of your hard-earned income goes into interest, and which card is a better option.

A Few Strategies to Pay Down Your Credit Card Debt

Despite being responsible in paying the balance on your credit card, sudden emergencies may come up and your credit card is your only choice for massive expenses. Whichever the case, getting back on your feet financially should not feel like Mission: Impossible. If ever you find yourself in credit card debt, here are a few approaches that are worth a try.

  1. Lower your interest rate. You can actually negotiate with your credit card company to lower your interest rate; getting declined for this request is quite rare. If approved, your APR may lower to 6%, which makes a huge difference in catching up your balance. If they push back let them know you have an offer from another company to move your balance.
  2. Consolidate your debt. As mentioned while discussing credit card types, a second credit card with significantly lower APR can help consolidate the debt on your first credit card.
  3. Use a personal loan. Similar to consolidating your debt with a second credit card, you may take out a personal loan to pay off your credit card. Personal loan interest rates are as low as 6-7%, compared to the 15-20% interest rate on your credit card. Pay off your entire balance due to clear your card, and then you are left with considerably lower monthly fees to pay off your personal loan.
  4. Double your monthly payment. Paying the minimum amount will take years and years to complete, but doubling your monthly payment will ensure that you pay off your debt faster, as the interest will not have that chance to continue growing.

About The Author

Joelle sees writing as a craft, and is genuinely interested in the topics she tackles, which have ranged from finance and transportation, to pop music, to business advice, to society and culture, to performing arts. She has a Master's in Art Theory and Criticism from the University of the Philippines and is pursuing a PhD in Philippine Socio-Cultural Studies. Her works have been published in broadsheets, lifestyle magazines, online portals and academic journals. Her performing arts reviews have been published in Malaya, Manila Times, Critics Republic, Malaysia, and RealTime Arts, Australia, while her academic work appears in The Borneo Journal and the Journal for the Anthropological Study of Human Movement.

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