The Financial Industry Regulatory Authority (FINRA) periodically conducts a study to assess the financial literacy of American consumers as part of the National Financial Capability Study. Of the most recent test, only a third of the takers were able to correctly answer 3 or 4 of the 5 questions. Although the test is just a part of the study, the results were key indicators suggesting widespread financial illiteracy across the country.
Now that online shopping has become mainstream, credit card companies, financial services providers and banks are inundating customers with offers to apply for credit cards. While a credit card offer is very tempting for young adults, it makes them vulnerable to risks of getting into financial trouble. Not unless they are properly equipped with knowledge on how credit cards work and how to make the credit tool work to their advantage.
As it is, it would be hard for a new credit card user to manage credit card spending and payment, if does not fully understand the financial terms and conditions by which credit card purchases work.
Nevertheless, the latest observations in the personal finance sector is that credit card use is no longer as prevalent as it was several years ago.
Credit Card Use is No Longer Prevalent
Credit card balances have been going down continuously. The trend denotes that consumers are now shopping smartly, limiting the use of credit cards. Credit purchases if any, are confined to amounts that can be paid in full immediately, to avoid amassing large amounts of unpaid credit card debts.
Credit card users have finally learned that doing so reduces the amount of interest charges imputed on the total principal amount that must be settled as soon as possible.
Moreover, users finally understood that paying only the minimum amount suggested by the credit card company doesn’t work to their advantage. Deferring payments only increases the interests and penalty charges due on their total unpaid balance.
Understanding How Credit Cards Can Be Beneficial
As a financial tool, credit cards can increase a consumer’s buying power, but not necessarily extend the terms of the credit obligations. Other benefits of using credit card depends on a consumer’s financial condition, which include:
Making credit purchases that can build a good credit history, which in turn, could open opportunities for a future housing or a car loan.
A credit card reduces the need to carry cash in one’s person, which if lost or stolen can be blocked and reported to law enforcement authorities. Also, there’s a federal law limiting a cardholders’ obligation to $50 for any unauthorized purchases made during the time the card was reported stolen.
What Type of Credit Cards are the Best to Use for One’s Advantage
While the problem with having a credit card is the temptation to buy things you don’t really need, which can lead to overspending. It would be best to use credit card/s with offers of cash back or rewards that in a way help optimize one’s budget. Some cash back can be redeemed by applying it as payment to one’s unpaid credit card balance.
As much as possible, choose a credit card whose issuer commits to reimburse you for any fraudulent transactions affecting your credit balance.