credit cards and a wallet in the background.

Your Cover to Cover Guide on Benefiting from Credit Cards

This post comes from a Personal Profitability partner.

Money matters for many reasons. For one thing, money is closely associated with security, stability, and independence. Without it, it’s near impossible to plan with any degree of certainty. Credit cards feature prominently on the financial spectrum of tools, resources and options. An article published in the New York Times indicated that the credit card industry is booming. While this bodes well for banks, it’s an ominous sign for consumers. Many retirees are now placing an increasing burden of their monthly expenses on credit cards. With nothing but Social Security payments coming in, this is a risky proposition.

In Q3 2017, the biggest 4 banks in the United States – Wells Fargo & Company, JPMorgan Chase, Bank of America Corporation, and Citigroup generated $4 billion in pre-tax income through their credit card operations. Another startling statistic headlined earlier in 2017, when US household credit card debt topped the April 2008 figure at $1 trillion +. All in all, the number of credit card customers in the US exceeds 171 million people, as reported by TransUnion. These statistics are particularly troubling to people who don’t have an innate understanding of how to deal with credit card repayments, credit facilities, or even how to choose one credit card over another.

What do the Pros Say?

A credit card comparison page confirms that clients need to shop around for the best deals. Financial advisors across the board agree that meticulous selection of credit cards is imperative for keeping costs as low as possible to guard against unreasonable debt to income (DTI) ratios.  

Overall credit utilization levels are rising, but banks have been careful to limit their credit allocations to customers. Although 171 million people are using credit cards, that number doesn’t do justice to the checks and balances that banks are putting into play to protect themselves against default. Additionally, customers are a lot savvier about the types of credit cards they are applying for. Cashback, rewards, low-interest APRs, and other options are now being used to reduce the burden of credit card debt as a percentage of overall debt.

The US economy has been subject to an extended period of ultra-low interest rates. This clearly disadvantages banks in a big way, since they derive most of their profits from loans. With the federal funds rate currently at 1.25% – 1.50%, banks are rather limited in terms of how much they can realistically charge customers in interest. The spread for banks is found in the rate they levy on loans, versus the lower rate they pay on savings deposits.

Banking on Credit

In an era of low interest rates, banks rely heavily on their high yield cash cows like credit cards. The $4 billion generated by the 4 biggest banks is a case in point. By May 2017, the total US household debt amounted to $12.7 trillion – a staggering amount. It is largely made up of mortgage-related debt, automobile debt, student loan debt, credit card debt, and other debt. On a plus note, banks have reported lower overall levels of credit card delinquencies – an indication that the debt to income ratio is still at a manageable level.

Customers are not interested in slipping into another recession, losing their life savings in their 401(k)s, and being saddled with untenable credit card repayments. To this end, they are selecting credit cards with cashback offers (between 1% and 3%), low APRs (0% for 12 months or 18 months), and bigger rewards. Even so, it’s imperative to repay credit card balances in full before the end of the month. This is perhaps the most challenging aspect of sensible credit card practices. The only way to dramatically reduce the burden of credit card debt is to use the savings and rewards offered by these lines of credit to your advantage. For example, big-ticket purchases on credit cards are typically associated with cashback. By paying it off in full, the discount is the cashback.

Your Cover to Cover Guide on Benefiting from Credit Cards