Credit card debt among Americans is sky-high right now. Back in May, the Federal Reserve noted that we’d reached a dubious milestone: Americans’ credit-card debt had reached the $1 trillion mark, the highest since 2008. The average household carries a little more than $16,000 in credit-card debt; some lower and some much, much higher.
Debt can be crippling. Many families, for whom the cost of living has risen out of proportion to their income over the past several years, find themselves living paycheck-to-paycheck, with little in the bank and often having more “month than money.” Credit cards often provide a deceptively convenient way to take care of the immediate problem, while passing the bill to the uncertain future. But as balances rise, so do finance charges. It’s a little like digging a deep hole around yourself, and finding the sides getting higher as you try to climb out.
Of course, if you could pay for everything with the cash you have, you wouldn’t need credit. While that approach works great for those of us who can make that happen, many Americans don’t have the knowledge, circumstances or discipline required.
So, what are the options? Other than carrying out a cash-only existence, you can be a victim of credit or make it work for you. While many young adults appear to be avoiding credit cards (perhaps after seeing the previous generation struggle with them), many financial experts say that using credit responsibly is a learned habit, and it’s best to learn it while you’re young.
My own experience with credit started at a tire shop in McComb. When I got my first paycheck from a part-time job, one of the first things I did was to go to the tire shop and get new tires for my old car. The tires cost more than my meager paycheck, and the owner of the shop suggested I buy the tires on credit at zero interest. Despite my lack of credit history, he extended the credit because he knew my family. I was a little reluctant at first, but it didn’t take me long to pay off those tires, and I showed up like clockwork to make the payments. I still remember the feeling of accomplishment I had when I plunked down the final payment.
Establishing credit is different today. The complicated credit-scoring system looks at whether credit has been offered and used and whether you’ve met your obligations. The resulting credit score isn’t sympathetic to your life events, nor does it care about how great a person you are, or consider your feelings. It boils everybody down to a number.
But, it is possible to make the system work for you. The “Cashlorette” (Sarah Berger) wrote recently on her blog about how to establish a good credit history for millennials. Berger notes that it’s crucial to show you can use credit in the first place.
- First, she advises, establish a habit of paying your balances in full, every time.This will show future creditors that you are serious about your responsibilities. “Link a small, fixed expense to your credit card; one you know you can pay off every time, like your Netflix subscription,” Berger advises. “This is a simple way to slowly build credit, without having to stress over accidentally overspending.”
- Pay attention to your utilization ratio. While this sounds complicated, it’s really not; it’s just the percentage of available credit you’re actually using. Keeping this number around 30 percent gets you the best score. For example, if you have a credit line of $1,000, keeping your credit balances below $300 is considered acceptable utilization of credit. (Be sure to include all your credit cards in this equation, not just one.)
- Apply for the right card. There’s a plethora of cards out there, offering all kinds of “rewards” and “incentives”. But keep in mind these things are there to encourage you to use the card, so choose wisely.
- Avoid store credit cards. While it’s tempting — and a little bit of a status symbol — to pull out a credit card from your favorite clothing store, such cards often have the highest interest rates in the industry.
- Don’t look at your available credit as a license to spend. For most purchases, use cash or a debit card. If you want to make a purchase, delaying the instant gratification and saving up for it puts the power in your hands, and you’re far more likely to appreciate it as well.
Check out Berger’s full blog post here: http://bit.ly/2w3nZ7h.