Upticks: Credit Card Information

By Jake Falcon on December 17, 2020

Credit cards can be a great tool to build credit, earn rewards, and pay for both everyday items and emergency expenses. While they do have many benefits, credit cards can also be a burden if they aren’t used correctly. In this episode of Upticks, Jake discusses the upsides and downsides of credit cards, and ways to pay down their balances.

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Credit cards can be a great tool to build credit, earn rewards, and pay for both everyday items and emergency expenses. Before we discuss the downsides of credit cards, I would like to focus on their benefits.

Paying your credit card bill in entirety each month is a great way to build credit and increase your credit score. Even if you’re a retiree with no debt, if you think there’s a possibility you may someday apply for an auto or home loan, it’s helpful to have a good credit score so you can obtain the lowest interest rate possible.

In the COVID-19 era, credit cards are considered to be more sanitary than cash. And it’s generally safer to buy things with a credit card than a debit card, whether you’re shopping online or in a store, dining in a restaurant, etc. If a criminal were to get a hold of your credit card number and use it to make fraudulent purchases, the credit card company will usually quickly remove the fraudulent charges from your balance. However, if that same person were to steal your debit card number, they now have access to your checking account. That makes the situation a lot more complicated.

It’s also important to be wary of fees for just having a credit card in general, much alone if you carry a debit balance.  Not all fees are bad you just want to make sure you understand what you are paying for.

And perhaps the biggest reason people apply for credit cards in the first place: rewards. If you use a credit card for most purchases, it’s not difficult to rack up significant rewards than can be redeemed on flights, hotels, consumer electronics and more.

Caution is necessary

Of course, there are downsides to credit cards. Credit card companies and banks are hoping you don’t pay off your balance in full each month, allowing them to charge you double digit interest rates.

As a financial advisor, I of course think everyone should do all they can to avoid credit card debt. But sometimes things happen—job loss, unexpected expenses—that make credit card debt inevitable. It’s so easy for credit card debt to grow into a terrifying amount. If you find yourself in this situation, what can you do?

Many financial gurus recommend the snowball payoff method. Let’s say you’re carrying debt on four credit cards.  (We recommend you only have 1-2 credit cards) The snowball method indicates that you should pay the minimum on three of the cards, while paying as much as you can on the card with the lowest balance. The idea is that you get one card paid off, then two, then three, before finally freeing yourself of credit card debt.

The reason the snowball method is so popular is the psychology behind it. Seeing one card after another paid off gives people a sense of progress and keeps them motivated to pay off all their debt.

At Falcon Wealth Advisors, however, we recommend a different strategy for our clients with credit card debt. We counsel clients to first focus on the card with the highest interest rate, rather than the lowest balance. Paying off the card with the highest interest rate first means they will potentially pay less in fees than if they were to employ the snowball method.

Transferring your credit card balances to new cards with a zero percent interest rate can sometimes be prudent, but you need to keep in mind the fees to do so, and that constantly opening and closing credit cards can damage your credit score. Of course, the hard part comes after the debt is shifted to the new card: you usually have to pay it off in a fairly short period of time, or else you’re right back where you started.

Some people borrow against their home or withdraw money from their retirement accounts to pay off credit card debt. This may make sense in some circumstances, but not always.

I think three keys to success in paying down credit card debt are to have a plan on paper; set up automatic payments if you’re able; and first focus on the card with the highest interest rate. In addition, it’s also not a bad idea to call a credit card company and ask if they can lower your interest rate. They’ll sometimes do this, especially for long-time customers who let it be known they can take their business elsewhere.

If you’re considering different strategies and tactics to pay off your credit card debt, please call us at Falcon Wealth Advisors. We’re happy to help and share our insights.

Now what?

If you’re someone who has never had credit card debt or has paid off all their debt, there are still advantages to using credit cards—assuming you can keep them paid off each month. As I mentioned, it will help keep your credit score high, offer rewards, and give you a way to pay for unexpected costs at a moment’s notice.

Speaking of unexpected costs, if you’re someone who always, always, pays off their credit card bill each month, it may be a good idea to ask the credit card company to increase your spending limit. Why? Increasing that limit could help your credit score by showing a higher debt-to-credit ratio. This can lead to potentially receiving a lower interest rate if you do apply for any type of loan. And you’ll have access to more spending power, should you ever need it in an emergency.

Whether you are struggling to get out from under credit card debt or want to learn more about leveraging your cards to increase your credit score, Falcon Wealth Advisors can help.

-Jake Falcon, CRPC®