Credit Cards: The good, the bad and the ugly

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NEWS: The New York Fed’s quarterly report, which came out in November, shows that credit card debt in the U.S. is 15 percent higher than it was at this time last year, the biggest increase in two decades, and delinquencies – people who are at least one payment behind – are rising as well.

WHAT THIS MEANS TO YOU: It’s the holiday season, heating costs are higher than they’ve ever been, inflation is still a thing, and the credit card is right there in your wallet to use.

There are more than 500 million credit card accounts open in the U.S., according to the New York Fed. We open accounts early and often – nearly three-quarters of Americans have at least one credit card by the time they’re 25.

The amount of credit card debt in the U.S. is higher than it’s ever been – nearly one trillion dollars, and rose an eye-popping $38 billion between the second and third quarter this year. So it may not surprise you that the number of people having trouble paying their monthly credit card bills is on the rise as well. While not at pre-pandemic rates, delinquency is up, particularly for people with lower incomes. That makes sense, right? If you don’t make a lot of money, you’re liable to charge more, including things like groceries and gas, and also have more trouble paying your bills. It’s a vicious cycle.

Today’s column isn’t to shame credit card users, though. Credit cards aren’t bad. In fact, they can be good. But a little knowledge goes a long way. Understanding how your credit cards work and what the consequences of a seemingly innocent missed payment or two can be will help your wallet in a big way.

It might feel scary but it’s better to know the truth.

Know Your Cards

If you’ve never looked at your credit card statement, now is the time to do it. You may not want to, in the way you don’t want to look at the dead mouse the cat left next to your bed. It’s there, it needs to be dealt with, but it’s unpleasant and as long as you don’t look, you don’t have to think about it. It’s easier now than it ever has been to ignore credit card statements, since you can pay online instead of getting that bill in the mail that you have to open and look at. 

Take a deep breath, open your account online, and click on “statement.” You may have to download a PDF to see it, but don’t let that stop you. 

If you get your bill in the mail, go find it in your bills to pay file, or fish it out of the unopened mail pile, or the trash can, or wherever and take a look.

Find the part that shows what you will pay if you only make minimum payments, and how long it will take to pay it off. Depending on how much you owe and what your interest rate is, this can be a startling number.

Another thing to look at is what you were charged for interest for the month. That can be startling, too. It may even be high enough that it’s an amount you wouldn’t spend on a purchase.

I won’t get into a mind-numbing math problem here, but it’s worth it to read the part of your statement that explains how interest is compiled. Even if you don’t understand it well (there’s a reason I’m not trying to explain it, I have trouble grasping it, too), it’s worth knowing that there’s a method to the madness and it’s costing you a lot of money.

One thing to keep in mind is that even if you don’t use a card, if there’s a balance on it, it continues to grow because of that interest. If you miss payments or the card is maxed out, over credit limit fees and late payment fees add to the balance, which means more interest is charged. If you just make minimum payments, you are paying mostly interest, which is why the balance never seems to go down much. 

By the way, credit card companies don’t provide that information on your statement showing what your card is costing you because they’re nice and want to help you out. They were forced to by the Credit Card Accountability and Disclosure Act of 2009, which added provisions to the Truth in Lending Law regarding credit cards. The aim is that once people see how much their credit card is actually costing them, they’ll make better decisions about using it.

The ball’s in your court.

There’s a right way to use credit cards.

Credit Cards: The Good

New Hampshire consumers are fairly responsible with it comes to credit card use. A recent study by found Granite Staters have the ninth-lowest 90-day delinquency rate of all 50 states, at 6.56 percent, compared to the 8.22 percent national average.

Credit card debt accounts for 17.4 percent of the average New Hampshire resident’s non-mortgage debt, and the average credit score in the state is 734, which is pretty good. The average balance per capita in New Hampshire is $3,240, but that’s per capita, so balance per credit card holder is much higher.

Some of New Hampshire’s positive numbers can be attributed to good old-fashioned northern New England frugality – neighbors Vermont (fifth lowest) and Maine (seventh lowest) look good, too.

But some of that can also be attributed to wealthier Granite Staters, who pay off their balances, make on-time payments, and don’t use credit cards for everyday purchases. Numerous studies show that the more money you have, the easier it is to manage your credit card debt. Those with lower incomes have a higher utilization rate (the amount of balance vs. their credit limit). 

That doesn’t mean lower-income consumers can’t have good credit card relationships. It’s just harder. The irony is that managing credit cards well is a good way to build wealth.

People who don’t have a credit history have more trouble getting a car loan and other types of credit. Having a credit history is important in today’s economy, and the best way to do that is by having one or more credit cards.

The thumbnail of your credit history is credit score, which we looked at in depth in January’s column.

If you don’t have a high income, the important thing is to get a credit card with a low limit and a low-interest rate (or the lowest you are offered). There are a lot of “starter” credit cards available now, so as long as you have a steady income, you can likely find one. Once you get it, make your payments on time and pay a substantial amount of the balance (or the full balance) each month.

If you’re a credit card veteran, on-time payments and a low utilization rate will increase your credit score. If you’re maxed out, start paying down the highest-interest card, without using it. It’ll be slow-going at first, but once you get the balance down, your payments will be much lower and you’ll have more money available (more on this later.)

Whether you’re new to credit cards or have a long-term relationship with them, nail down just exactly what you will use your card or cards for, then stick to it. Groceries, gas, the electric bill and other necessities shouldn’t be part of that. Force yourself to cut expenses and make choices that will lower your credit card bill and the amount of interest you are paying to a credit card company every month.

Maxing out your credit card is a bad step on a slippery slope.

Credit Cards: The Bad

Using credit cards only for specific things and not relying on them is easier said than done, particularly if you don’t have a lot of money coming in. 

But the bad part is that once you max out cards, it’s a never-ending spiral. The payments are high, the cards aren’t much good to use for an emergency or anything else, since you don’t have much credit available, your credit score is getting lower and too much money is going to making payments that don’t make a difference.

So, while you rationalize that you “need to” use your card for necessities, using it that way is actually putting you more into the hole.

Turning it around by making more-than-minimum payments and not using them may mean a prolonged period of scraping by as you use the money you have on hand to pay for everything. To help with the mental battle, keep reminding yourself that if you use credit cards to pay your bills and other expenses, you are making things worse. If you have to, print out that credit card statement, highlight or circle the scariest numbers, and put it on the fridge or your bathroom mirror where you can see it all the time.

Credit Cards: The Ugly

The credit card debt spiral may become so bad that you either can’t pay, or just give up on paying out of financial weariness. Get a grip! No matter how bad it is, the solution should not be to stop paying your credit cards.

If you stop paying your credit cards, no matter how bad you think things are, they will get much worse. Your balances will balloon with late fees, and interest will be charged on the higher balances. After three months, you’ll start getting nonstop collection calls. You may even end up in court.

Best case scenario? Your credit score will plummet and your credit report will have a lot of nasty marks. If you need a car loan or some other kind of emergency credit, you won’t get it. A bad credit score can also affect insurance rates, ability to get an apartment or job, and all sorts of other things. It’s a nasty catch-22 that once you start, it’s almost impossible to get out of.

No matter how ugly things seem, don’t stop paying your credit cards, even for a month.

You have the power to control your credit card habits.

What To Do if Good Becomes Bad or Ugly

No matter how hopeless things seem financially, you are the person in control of your finances and you have the power to turn it around. It’s not fun, it’s not a quick fix, but it’s better than the alternative, which is the anxiety and sleepless nights of wondering how you’re going to pay your bills as you get hourly collections calls.

Here are some solutions, in order of situation direness, from least to worst.

  1. Stop using cards, except for emergencies, and pay them down. There are a couple strategic ways to do this. The most effective is the “debt avalanche.” You pay down the card with the highest interest rate first, making as big a payment as you can, while making minimum payments on the other cards. Once that card is paid off, start on the next-highest interest. Ideally, you pay the same overall amount a month toward credit cards, so once one card is paid off, you have a lot more money available to go after the next card. Another method is the “debt snowball,” where you pay off the card with the lowest balance first. This can be effective psychologically because you see faster results, as far as a card being paid off. It costs more in the long run and doesn’t reduce your monthly credit card bills as fast, though, since the highest-interest card is still accumulating interest. Using either strategy is a much more effective way to pay off credit cards than something more random.
  2. Call your credit card companies and negotiate lower interest rates. This only works if you have a decent credit score and have a good payment record. It can be hard if you’re not the kind of person who’s good at negotiating or advocating for yourself, or hate dealing with customer service. But it’s worth a try if lower monthly credit card payments are all you need to get your budget on track.
  3. Call a nonprofit credit counseling agency. This is the go-to option if neither 1 or 2 work. It doesn’t mean you have to commit to a debt relief plan, just that you’re getting a weigh-in from someone who is trained to offer advice to people like you. The key is “nonprofit.” Find one on the National Foundation for Credit Counseling website. Nonprofit counselors are legally required to give you advice that will help you, and are not allowed to simply try to sell you a product. They’ll go over your finances and help you figure out a budget, then they’ll help you review what your options are. They also can offer financial literacy resources, and know how to find help to pay heat bills, get housing and more. They may suggest a debt management plan, which is debt avalanche, but facilitated by the credit counseling agency. You make a fixed monthly payment, determined by your budget, and they work with your credit card companies to get lower interest rates, then they make your credit card payments for you. It takes 3 to 5 years, and the companies charge a monthly fee that’s part of your payment, usually $35 to $50. It’s the best way to pay down credit cards, and also will break some bad habits, since you can’t use your cards while you’re in the program. Your credit score may go down a little when you start, but then will start climbing up because your payments will be on time and your balances will shrink.

One big don’t is handing your debt over to a for-profit debt settlement company. Even though there are laws that require full disclosure, it can still be hard to understand what they’re telling you or what it will cost you. It may sound good, but it will cause financial issues for you in the long run. While you may only have to pay 50-60 percent of your debt, you will also pay fees, your credit score will seriously drop and stay there, and, since you didn’t pay your full balances, your credit report will reflect that for seven more years. It’ll have a serious impact on your ability to get credit in the future, because lenders will determine you’re not someone who will pay what you owe.

You’ll also have to pay income tax on the amount of balances forgiven if it’s higher than $600.

While there is also nonprofit debt settlement, that’s a different deal. It’s a new concept that’s offered by nonprofit credit counseling agencies, not for-profit debt settlement companies, and you’ll only be able to do it through a nonprofit credit counseling agency, if you qualify.

Credit Cards: A New Year

It’s a tough time of year to crack down on spending. Between the holidays, having to pay heat bills and everything else, trying to get finances on track can be downright miserable. Give yourself the gift of power, though. Tell yourself that you will take control and at this time next year, you will look back and be glad you did. 

Here’s to a great 2023!


About this Author

Maureen Milliken

Maureen Milliken is a contract reporter and content producer for consumer financial agencies. She has worked for northern New England publications, including the New Hampshire Union Leader, for 25 years, and most recently at Mainebiz in Portland, Maine. She can be found on LinkedIn and Twitter.