The Perils of Plastic
“Americans may be heading for another credit card crunch,” said Millie Dent in TheFiscal Times.com. Outstanding credit card debt in the U.S. is expected to climb to more than $900 bil lion this year, bringing the average indebted household’s balance to $7,813—the highest level since the end of the recession, according to credit card comparison site Card Hub.com. “While that buying binge could potentially signal improved confidence in the economy,” it comes with plenty of risk. Consumers have racked up more debt than they’ve paid off for seven out of the past 10 quarters, and many Americans underestimate what they actually owe. In a recent survey by the Federal Reserve Bank of New York, respondents underestimated their debt by an average of 37 per cent. A financial reckoning may be “closer than we realize.”
This rising tide of debt comes as Americans have more access to credit reports than ever—and higher credit scores, said Tom Anderson in CNBC.com. The average FICO score is now 695, the highest it’s been for at least a decade, according to credit score creator Fair Isaac Corp. “Yet major misunderstandings about credit cards persist.” A recent survey by Bankrate.com found that more than three-quarters of Americans don’t know that accounts with high outstanding balances can hurt their credit score. Some 55 percent thought that carrying a balance would actually improve their score.
Don’t hang on to old cards simply because you are afraid of hurting your credit score, said Hadley Malcolm in USA Today. “It turns out that canceling an unused or inactive credit card account doesn’t do as much harm as many people believe,” especially if the card has a small credit limit. That said, if your credit account has been open for a while, it might be worth hanging on to if you can keep your spending in check, since length of credit history is one of the main factors that influences credit scores. Just be mindful of how big your credit limit is, because the percentage of available credit you’re using accounts for about a third of your credit score. A rate of about 20 percent or lower is good, according to FICO.
“There are other ways to build credit besides taking the plastic route,” said Geoff Williams in USNews.com. Paying off student loans is an opportunity to build credit, and building a good relationship with your local bank or credit union can also help you secure a car loan or other small loan without having a lending history. Credit-builder loans, which work like a secured credit card, are also popular with credit unions and often don’t require any collateral. The bottom line: “If you want to borrow in the future, your past has to show that you’ve borrowed from somewhere.”
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