There’s no doubt that credit card spending is a fact of life in the U.S. Because it feels “easier” than spending cash, consumers tend to spend more on credit, the Consumer Financial Protection Bureau says. It adds that consumers are more inclined to make credit-buying choices today that their future selves wouldn’t make.
There was $974.3 billion of revolving debt outstanding in January 2017, according to the Federal Reserve, up from $845.7 billion in 2012. If you’re among the many consumers who think they can control their credit card debt by paying off their bill each month, you should know that only about 29.7% of cardholders were found to actually do so in the most recent Credit Card Market Monitor report from the American Bankers Association. The report found 42.2% of credit-card borrowers let the balance roll over month after month by making the minimum payment or even adding more charges; 28.1% of accounts were dormant.
Do you need credit cards?
You may want to consider not having any credit cards, although this is a tough sell for many people. After all, they are convenient and can help with unexpected emergencies. Also, many people use them as a tool for establishing a credit history and credit rating.
It’s a common misunderstanding, but be assured you do not have to carry an unpaid balance on your credit card to build a credit history. Your best bet to build credit is to to make a few charges on your credit card but pay off the bill in full each month.
If you do carry a balance, try your hardest to pay off the balance as quickly as possible and not just making the minimum payment each month.
If you take a look at one of your credit card bills, you’ll see a section near the center of your bill that is required under the federal CARD Act (Credit Card Accountability, Responsibility and Disclosure Act). It is separated into two parts in which it is explained how long it will take you to get out of debt. The first section shows the approximate number of years it will take to pay off the balance if you make only a minimum payment each month. The second section shows how much you must pay to eliminate the debt in three years or less. If your debt is small, these numbers might be the same.
Finally, try very hard to use credit cards sparingly. That means for emergencies only (unexpected auto repairs or medical bills) and not for necessities such as groceries or rent.
Know your rights under the CARD Act
In 2009, Congress approved the CARD Act to better protect consumers against certain practices and transparency issues in the credit-card market. Administered by the Consumer Financial Protection Bureau, the CARD Act provides consumer protection by:
- Prohibiting the amount card issuers can increase the interest rate on existing balances, except when the cardholder misses two consecutive payments.
- Requiring card issuers to provide 45 days’ advance notice when increasing the interest rate.
- Requiring that credit card bills be due on the same date each month and that payments received by 5 p.m. be treated as timely.
- Ensuring late fees and other penalties be “reasonable and proportional,” set by the Federal Reserve Board at $25 for the first violation and $35 for a second violation in a six-month period.
- Prohibiting card issuers from charging an overlimit fee unless overlimit transactions are allowed.
- Prohibiting more than one overlimit fee on any one statement.
- Requiring monthly statements to include how long it will take to pay off the bill and the total cost of paying only the minimum amount due.
- Requiring monthly statements to include the amount cardholders must pay each month to pay off the bill in three years, the total cost of doing so, and the savings versus making minimum payments.
- Requiring monthly statements to include the annual interest and total fees.
Additionally, if you pay more than the minimum amount each month, the credit card company must apply the excess to the balance with the highest interest rate. So if you have outstanding balances with different interest rates, say for purchases and cash advances, it would be applied to the one with the higher rate, which in all likelihood in this case is the cash advance balance.
How to find the right card
Now that you know your rights and how to take responsibility for your credit card debt, you may want to find the best credit card for your needs. For reviews and comparisons, check out SuperMoney’s credit-card reviews.