Sunday, 28 April 2019

Credit Card For Beginners: What To Consider Before Getting a Credit Card

Credit Card For Beginners: What To Consider Before Getting a Credit Card

As you know on this blog I talk about credit card a lot as if everybody should get one but this is not the case, not everyone should be getting a credit card and it could be quite dangerous for some people. Today we're going to look at some statics to see which kind of people should completely avoid credits card altogether and not even get one from the beginning.

Did you know that 38% of all Americans are actually holding credit card debt, this is about one in 3 people, the average household debt is about $6,000

This nice chart is very interesting, if you look at the average credit card debt categorized by net worth, you'll see that if you're or less than 0 of net worth, you actually have about $10,000 of credit card debt. This is very much in contrast to people who have even a little bit of net worth

Read: Follow This Simple Step To Get Out Of Credit Card Debt

What this says is that people that aren't in a very good financial footing actually need to lean on credit card debt in order to help themselves out. However, when you do lean on it you're actually digging yourself in a bigger hole because every time you borrow a little bit, you have to pay a little bit more in interest

It's just that if you borrow now, it may not hurt as much now but in the future, you're going to have to pay it back with interest and so it's just not going to hurt now it's going to hurt later

Read: The Best Way To Pay Off Your Credit Cards Faster

As you increase your net worth maybe you have a little bit more to spend and so you carry a larger and larger credit card debt 

People with less than zero amounts of net worth are actually carrying a lot more credit card debt than people that actually do have a net worth. 

  • Zero net worth, This is the category of people that should not have credit card debt at all because this group of people is the one that will hurt the most if you carry a credit card debt. 

There's no law that says if you have less than zero net worth, they cannot apply for a credit card or they cannot even have one 

However this is a free country and we're allowed to inflict pain upon ourselves if we choose to, so all these dangers things that we can do to ourselves we're free to do it if we want to, however, is up to us to be informed to choose not to do these dangerous things to ourselves

If you want to have a great financial future then you would try to avoid credit card debt if you have less than zero net worth.

This next chart shows the average APR for a credit card debt is about 15%, this is 15% per year if you owe $10,000 15% of that is $1,500. Now $1,500 for a person that has zero net worth probably means a lot of money to them.

Being in $10,000 in debt means you're foregoing the $1500 every single year, so because you've got yourself into this hole you lose this $1500 that could have been used to pay something else, if you never dug yourself into that, you could have a little bit of extra cash

I realize that sometimes you just don't have a choice and you have to borrow, but do you understand that if you do borrow from a credit card is going to hurt a lot more later and you're going to end up borrowing with the first month and the next month you go again and again up until it goes up to the limit 

And then they're going to say hey you are paying minimum payment you are pretty good credit card user so let's raise your limit, okay they raise your limit by doubling it or something and then you just keep on borrowing more and more and in the end you're just going to have this huge gigantic debt that you can never get rid off.

This next chart shows the average credit card debt by income, it's no surprise that as you make more you're probably going to have a bigger debt but what's not shown here is the income is not very much related to your net worth

  • Someone with $150000 or $160000 of income may have zero net worth because they're just spending it all and then they're using their credit cards they have this huge credit card of about $11,000, but yeah if you compare to their income they might be able to pay it off in one month

But somehow they're still carrying this average credit card debt. My recommendation here is that if you've never gotten the credit card before and you're trying to decide if you should get one or not, the one factor to look at is if you're really good with your finances 

If you've been known to pay for all your bills and stuff you're pretty on top of everything then yes it might be safe to do so, if you are constantly in debt with a credit card, you might just want to pay it all off and cut those credit cards, because you don't want the temptation there to pull you back into the debt unless you know that you definitely will not get into debt again

One other indicator of course from the very first chart I showed is looking at your net worth. Calculate your net worth, most likely you kind of know where in the ballpark you are, if you are zero net worth, if you've let's say 5000 or $10,000 of net worth or less, it might be better off for you to just hold off on getting a credit card until your net worth is a little bit higher than that threshold.

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