Credit cards are a little polarizing in the world of fiscal responsibility. Some financial advisors are completely against them, while others admit they have certain benefits when used correctly. In addition to earning different points, rewards, or cash back, a credit card can provide a boost to your credit score.
Of course, this can quickly change if your credit card payments are not handled properly.
Make no mistake…
The Road to Credit Card Debt is Paved with Good Intentions
Almost everyone plans to keep their credit card paid off at the end of the month. They simply want the credit boost, along with the ability to earn rewards and bonuses that most credit cards offer. These can certainly be beneficial if you stick to the plan of keeping your card paid off as you use it.
But most banks and credit card companies are betting against you, and for good reason.
Only about 30% of people pay off their credit cards at the end of each month. These people are called transactors. By comparison, about 40% of people have revolving debt from the month to month. The average amount of credit card debt per US household is over $5000.
But What About Using a Credit Card Only for Emergencies?
You may have noticed the percentages mentioned above don’t add up to 100%. That’s because there’s a remaining group of credit cards that remain dormant. The reasons for this can vary, but in many cases, it’s likely because people keep a credit card on hand solely for emergencies.
The question is…is this a responsible decision?
In the case of emergencies, a credit card is essentially a guaranteed high-interest loan. The average APR (annual percentage rate) for credit cards ranges from about 16-19% depending on the type of card. This is the amount of interest you are charged if you don’t pay off your credit card purchases at the end of the month.
Compared to the average car loan rate, which I around 4% or the average college loan rate which is about 5.8%, APRs are quite high.
Now, credit cards can have different (and sometimes confusing) rules when it comes to how interest rates are applied. If you pay off your full balance at the end of the month, you should be fine.
Some cards offer extended interest-free periods for special purchases or expenses of a certain amount. While that sounds great, it can make them even more dangerous. Let’s say you make an emergency payment of $1000, and it’s interest free for 6 months.
If you pay it off in 6 months, great. No extra charges to you. If you fail to have it paid off in time, however, you’ll likely be charged interest on the full amount. If your APR is 20%, that’s an additional $200.
Preparing for Emergencies the Right Way
Yes, there are certain scenarios where a credit card can prove useful, but for many, the risk of abuse is too great. The last thing you want is to be plunged into deeper debt by a credit card that was supposed to help you out.
When it comes to emergencies, the best way is to plan ahead. Regardless of your financial situation, everyone should have an emergency fund of at least $1000 put away in a savings account. This is enough to get people through most unexpected expenses.
But you shouldn’t stop there. The more savings, investments, and assets you have to your name, the more you’re protected against the unexpected moments of life. Imagine feeling okay when your car breaks down or your computer is stolen because you have the money on hand to replace it.
It’s not an impossible dream. It’s an achievable goal.
You just need to have a plan. We can help. If you’re looking for a financial advisor in Springfield, Ohio and beyond who can help you plan for your future, contact us today!