Survey Finds Americans Still Misunderstand Credit Cards, Credit

Credit cards and credit is not rocket science, but for many Americans, it may as well be.  A recent survey of 1500 Americans with credit scores under 640 ("Fair" to "Very Poor") by U.S. News produced some alarming findings.  Most Americans will agree that many among us misuse credit cards.  In 2016, the U.S. Census Bureau and Federal Reserve's data reported that the average credit card debt (for households that use credit cards and carry a balance) was a whopping $16,048!  But America's plastic problem actually begins well before people's first purchase with a spanking new card.

U.S. News' survey discovered that 35% of people with bad credit don't even take the time to research before applying for a credit card.  Why?  Lack of financial literacy was cited.  I agree with this, of course, and I'm conjecturing here, but could it also be that many Americans don't like to read?  Or maybe they see the act of shopping and comparing credit cards online as a waste of time?  Too boring?  Laziness?  Whatever the case, it's outright deadly to your finances not to look for your best credit options.

Look, you must at minimum seek out three specific items from an application for a credit card: 1) The Annual Percentage Rate or APR, 2) Charges you can expect for any late payment or for going over your credit limit, and 3) If there are any annual fees for membership.  Write this info down somewhere and keep it handy as you size up other cards.  What if, because of your credit score, all of the credit cards you can choose from offer the same or a similar APR, charges, and fees, meaning, it's like a tie?  Now it's okay to consider things like loyalty points, rewards, and cash back perks.  Don't choose a credit card with fancy gimmicks at the expense of higher interest charges or fees!

Another alarming finding in the U.S. News survey is that almost one-third of respondents aren't even trying to improve their credit score.  Meanwhile, 20% of respondents don't even know where to begin to improve their score.  If you were to ask Americans randomly, How do you go about improving your credit score?, what do you think they'd say?  Giving my fellow Americans credit, pun intended, I think many of them would say, "Paying off all of my balances!"  This would be an acceptable response, but it would demonstrate the lack of understanding about how credit works and how credit scores are determined.

U.S. News' guide recommends you look over your credit report at least once a month, and provides CreditKarma.com or CreditSesame.com as alternatives to paying for this service.  Just note, these sites will require some of your personal info and they only give you what's called an "educational" credit score.  This is in essence a simulated score that is calculated in much the same way that FICO does it.  So don't rely on it!

Let me give you a little story about why it's important to thoroughly review your credit report often.  When I was applying for my very first home mortgage, way back in 2002, the good people at Bank of America almost denied me a decent mortgage rate and wanted me to pay a point (fees paid to reduce my rate) because I had too many outstanding balances on my credit report.  Come to find out my father had made his way into my credit report.  We share the same name (I'm a Jr.), but obviously not the same social security number.  Still, there were his unpaid credit card balances ruining my chances at an affordable mortgage.  I disputed these errors and in due time all was well, and I moved into a townhouse in San Jose that year.  Moral of the story, view your credit report often and dispute any error or false information.

Unfortunately, using high interest rate credit cards to pay for monthly expenses has become normalized in America.  Many Americans fall short every month and use their credit cards to cover the gap, piling on debt just to stay afloat.  This type of existence becomes a new reality where people stuck in it don't see the truth: they are living above their means.  The solution, either making some serious cutbacks or finding ways to make additional income, becomes "too hard."  The irony of it all is that using credit responsibly will lead to people earning a better credit score which in turn will lead to people qualifying for credit cards with better rates, saving more money every year.



How can you start rebuilding your credit using credit?  If you're struggling to even get a credit card, one way to rebuild or repair your credit is to use an unsecured card for subprime borrowers or a secured card.  U.S. News recommends First PREMIER Bank Credit Card (unsecured, at 36% interest rate) or First PREMIER Secured Bank Credit Card (19.9% with a $200 security deposit).  Both of these cards provided by the same bank come with hefty fees, but that's the price you'll have to pay to move up in the world, so to speak.  When evaluating cards if you have bad credit it's even more important to be extra diligent.  Find a card that works for your situation, factoring in when your check comes in, what type of purchases you need to make using credit, and how often you expect to use your card.

There's no excuse for failing to make sense of credit cards or figuring out how credit works.  The 8th graders I teach each year learn and apply Newton's Three Laws of Motion, so I know that as adults, you can all easily handle a simple credit card application.  Until next time!