Most Americans have close relationships with their credit cards. They carry them everywhere and depend on them almost daily.
The question you have to ask yourself is: who has the upper hand in that relationship?
It’s really a question of whether you’re using your credit cards, or whether they’re using you. Plenty of Americans get the convenience of credit cards with little or no cost, and can even come out ahead financially by earning rewards.
However, for other consumers, credit cards add a considerable amount of expense to their cost of living. They may also create debt that robs them from their future wealth.
Read on to find out which type of credit card customer you are.
How often do you pay credit card interest?
People who pay their balances off every month get to use their credit cards without paying any interest. However, according to the Federal Reserve’s Survey of Consumer Finances, 45% of American families carry a credit card balance.
These credit card customers are paying a huge price. A report by the Consumer Financial Protection Bureau (CFPB) found that credit card companies charged customers over $100 billion in interest during 2022. That figure would almost certainly be higher now, since both interest rates and the total amount of credit card debt have gone up since then.
Not only have interest rates gone up in general, but credit card interest rates have risen especially fast in recent years. Margin interest is the percentage credit card companies charge over and above the prime rate. Earlier this year, the CFPB found that credit card margin interest has risen steadily to reach an average of 14.3%, the highest level on record.
Again, if you rarely carry a credit card balance, this doesn’t affect you. However, if you do generally have a balance, your credit card company probably loves you – you’re paying them a lot of interest.
Do you use a general purpose or private label credit card?
General purpose credit cards are the type of cards you can use anywhere. Private label credit cards are those associated with a particular retailer.
People often get convinced to sign up for a private label card in order to get a discount at the checkout counter. Just be aware that if you don’t pay your balance off promptly, that one-time discount can lead to an ongoing extra expense.
The CFPB found that as of the end of 2022, the average APR on general purpose cards was 22.7%. The average APR on private label cards was 5% higher, at 27.7%.
Again, if you don’t carry a balance, that higher rate won’t affect you. If you do though, private label credit cards can be an especially bad deal.
➤ SEE MORE:Are retail credit cards worth it?
Are you paying an annual fee on your credit card?
According to the CFPB, the percentage of credit card customers who pay an annual fee fell from 18% in 2015 to 16% in 2022. That’s the good news.
The bad news is that the total amount of annual fees paid more than doubled in that time period, from $3 billion to $6.4 billion.
So, the shrinking minority of customers who are still paying an annual fee are now paying a much steeper price.
If you’re part of that minority, you should ask yourself what benefits you’re getting in return for the fees you’re paying. Are the rewards you earn really that much better than you could get from a no-fee card? Are any other privileges that come with the card worth enough to justify the fee?
If not, then your credit card may be using you to earn annual fees you shouldn’t have to pay.
➤ SEE MORE:Are credit cards with annual fees worth it?
Do you often pay late fees?
Annual fees are bad enough, but credit card customers pay more than twice as much in late fees.
According to the latest figures, credit card customers were paying $15 billion a year in late fees. That doesn’t include the higher interest rates that are often assessed if you pay your bill late too often.
Late fees are especially damaging because they contribute to the type of debt spiral that keeps putting people deeper in the hole. After all, if you can’t afford to pay your bill on time, the last thing you need are additional fees that make your bill even harder to pay. If you miss a payment, you should immediately stop using your credit card until you can get back on track.
➤ SEE MORE:Tips to avoid credit card late fees
Are your credit card rewards working for you?
Everyone likes to earn rewards, but to figure out if you’re really coming out ahead you need to ask yourself two questions:
- Are you earning more in rewards than you’re paying in credit card fees and interest? For example, the CFPB found that customers who generally pay their balances off every month earn 73% of the total rewards paid out by credit card companies, while paying just 6% of the interest charged. That’s a good trade-off. Customers who regularly carry a balance have the other end of that deal. They pay 94% of all credit card interest while earning just 27% of the rewards. Not so good.
- Do rewards prompt you to buy things you otherwise wouldn’t. When you earn rewards on things you would have bought anyway, that’s a clear win. However, if you find yourself spending extra just to get rewards, that’s not to your benefit. For one thing, spending an extra $100 just to get $3 back isn’t a good deal. Worse, it could lead to overspending and debt problems that can do long-term damage to your finances.
➤ SEE MORE:Best rewards credit cards
Putting it all together
So what kind of credit card customer are you? If the following apply to you, then you’re probably coming out ahead in your relationship with credit cards:
- You avoid paying interest by rarely carrying a balance.
- You use cards with the lowest APRs available.
- You don’t pay an annual fee unless it pays off in benefits you couldn’t otherwise get
- You rarely if ever pay late fees.
- You earn more in rewards than you pay in fees and interest, and never buy things just to earn rewards.
On the other hand, if most or all of the above do not describe you, it may be a good idea to revisit your relationship with credit cards. It may well be that the credit cards are using you rather than the other way around.
