A recent National Foundation for Credit Counseling (NFCC) online poll revealed that close to one in five consumers, 18 percent, believe that carrying credit card debt over from month-to-month is a responsible way to manage his or her finances.
This data suggests that not only are many Americans are using credit cards to fund a lifestyle their income can’t support, but they are comfortable doing so.
Consumers need to be aware of the consequences associated with continually carrying credit card debt from month to month, some of which are below:
- Interest on a credit card is typically calculated on an average daily balance. For those who carry a balance over from the previous cycle, interest is not only charged on the unpaid balance, but on any new purchases added to the balance.
- With interest added onto the balance month after month, consumers end up paying interest on the interest.
- Carrying a balance has the potential to negatively impact a person’s debt to credit ratio, one of the main components of credit scores.
- A higher balance decreases the amount of credit available for future purchases.
However, there can also be disadvantages to charging too little. At the other end of the spectrum, a similar number of respondents, 21 percent, indicated that they do not use credit cards. While this approach to money management can avoid many financial pitfalls, it too has its problems:
- Although it is possible to pay cash or use a debit card for daily expenses, these types of transactions are usually not reported to the credit bureau. Most people need credit for major purchases such as a house or car, but without a thick and positive credit file, credit may be denied.
- Without credit cards, people miss out on the convenience of being able to purchase items or pay for services when cash is not readily available.
- Carrying cash is risky, as the money could be lost or stolen, whereas credit cards often offer consumer protection features including those against loss.
- Credit cards provide a safety net for emergency situations.
The majority of poll respondents, 61 percent, believe that paying credit card debt in full each month is the only responsible way to manage personal finances. The benefits associated with this type of behavior far outweigh any disadvantages and include the following:
- Timely bill payments and a low credit utilization ratio are typically the top weighted elements in credit scoring models. Therefore, this type of behavior could have a positive impact on an individual’s credit scores.
- The convenience of using credit can be enjoyed without paying any interest or penalties.
- The entire line of credit remains available for future use.
- Stress and worries of being over-extended are avoided.
People who repeatedly find themselves unable to satisfy their monthly debt obligations in full would be well-served by reaching out to an NFCC Member Agency for a one-on-one financial review with an NFCC Certified Financial Professional. To be automatically connected to the agency closest to you, dial (800) 388-2227, or go online to www.DebtAdvice.org . For assistance in Spanish, call (800) 682-9832.