FINANCIAL FRESHMAN #012

TL;DR → Credit cards can be powerful financial tools when used appropriately. Unfortunately, the majority of credit consumers in the United States don’t have a healthy relationship with their credit cards. Paying your balance in full each month, and keeping your utilization under 30% are good stepping stones to healthy credit card habits.

---

Fun Facts About Credit Cards

Whether you’re new to credit cards or have been using them for years, there’s a lot of interesting history and quirks that come along with them. Before we dive into some credit card best-practices, here are five fun facts that might surprise you and give you a deeper appreciation for the credit card in your wallet!

1. The First Card – The first modern credit card, known as the Diners Club Card, became available to consumers in 1950. Upon release, it was only able to be used at a handful of restaurants in New York City.
2. Travel Rewards – Airline miles as a reward for credit card use were first introduced by American Airlines and Citibank in 1981, giving birth to the modern travel rewards craze.
3. Origin of Cashback – In 1986, Discover became the first credit lender to offer cashback, allowing borrowers to earn a small percentage back on each purchase they make.
4. A Contactless Future – Europay, Mastercard, and Visa partnered to create EMV chip technology in 1994. In 2020, it was estimated that more than half of all credit card transactions were contactless!
5. Visa is King – As of 2024, the Visa network of credit cards is by far the most utilized, representing almost 60% of all cards in circulation.

(Not So) Fun Facts About Credit Cards

Unfortunately, most publicly-available facts about credit cards are not fun at all. Instead, they represent the United States’ tumultuous relationship with credit cards, and how the average American consumer does not use credit cards effectively. All information provided here comes directly from the Federal Reserve Bank of New York’s Center for Macroeconomic Data.

1. Debt is Rising – Total Credit Card debt rose almost 6% from 2023 to 2024, reaching a new total of $1.14 trillion (with a “t”) dollars.
2. Failure to Pay – In the last year, 9.1% of credit card debt transitioned into some stage of delinquency.
3. Sold to Collections – In the first quarter of 2024, around 5% of consumers had delinquent credit card debt sold to a third-party collection agency.
4. Pay to Play – Americans can expect to pay around $120 billion this year in credit card interest and fees.

Despite the bleak reality that millions of Americans are in, I’ll still make a claim that many personal finance sources may shy away from – credit cards are great*****. Of course, the five asterisks after that claim are purposeful. Let’s discuss each of them, to give you an idea of some best practices.

Credit Cards Are Great, as Long as…

1. Credit cards are great, as long as you pay your balance in full every month.
   • Credit cards only work in your favor if you avoid interest entirely. The moment you carry a balance, high interest rates can (and will) quickly erase any rewards you may earn from using the card. Always treat your credit card like a debit card with a slight delay, rather than a loan.
2. Credit cards are great, as long as you don’t spend money you wouldn’t otherwise.
   • Rewards, points, and cashback are all great things, but they should never justify extra purchases. If you are spending money you weren’t planning to spend just to earn rewards, the credit card company is winning.
3. Credit cards are great, as long as you understand your interest rate and fees.
   • Not all credit cards are created equal. Your APR, annual fees, late fees, and foreign transaction fees can vary widely. Knowing the fine print ensures that your credit card bill will never surprise you.
4. Credit cards are great, as long as you keep your utilization low.
   • Even if you pay off your balance in full every month, a high credit utilization can hurt your credit score. A good rule of thumb is to never use more than 30% of your credit limit to maintain a strong credit profile.
5. Credit cards are great, as long as you can handle emergencies without them.
   • Credit cards can certainly help in a pinch, but they should never be your first line of defense. Always make sure that your emergency fund alone is enough to cover unexpected expenses, without having to worry about them turning into debt.

I could likely add some more asterisks and grow this list, but I think this is a great starting point to using credit cards effectively.

Final Thoughts

Credit cards can be powerful financial tools when used appropriately. If you keep your credit card use inside the bounds outlined here, you will ensure that you are successfully taking advantage of credit, instead of it taking advantage of you!