I’m a Financial Advisor: 8 Things My Clients Don’t Know About Credit Cards
Credit cards are exceedingly prevalent in our society amid the ever-rising cost of living. As of 2022, 214 million adults (82% of the U.S. population) had a credit card. You’d think such a common payment method would be fully and unequivocally understood. But this isn’t the case. Many Americans don’t really see the full picture of how credit cards work. And it’s costing them.
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The importance of understanding the ins and outs of credit cards cannot be overstated, as credit cards are behemoth financial responsibilities. They can quickly build your credit history. They can even more quickly knock down your credit score. They can harm your financial well-being, even if you only err once. You can be rich, and still have bad credit, which can prevent you from taking on a mortgage or a new car loan.
GOBankingRates consulted financial advisors to learn the most common things they see their clients not knowing about credit cards in 2024.
They Don’t Know How Credit Interest Accrues
Credit card interest accrues daily, based on the daily balance. This is a fact that in the professional experience of Taylor Kovar, CFP, founder and CEO at 11 Financial, plenty of people don’t know.
“Many clients do not realize that credit card interest accrues daily based on the daily balance,” Kovar said. “This means that even if the balance is paid in full each month, they could still incur interest charges if they carry a balance month to month.”
They Don’t Know That Making the Minimum Payment Only is a Trap
Many people make only the minimum payment on their credit cards, because, well, why pay more than you must, particularly if you’re living on a tight budget? We all need to grasp that making just the minimum payment is a trap that will keep us caught in the vicious cycle of debt.
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“Clients may not be aware that only making the minimum payment can lead to major interest charges, prolonging their repayment timeline,” Kovar said. “Paying more than the minimum payment can save them more in the long run.”
They’re Lured By Perks — And Don’t Pay Attention to Annual Fees
These days, many credit cards come with handsome perks. But you need to look beyond them when signing up for one. There’s usually some ugly fine print — like information about annual fees.
“While credit card rewards can offer enticing perks, clients may overlook the fact that many cards come with annual fees,” Kovar said. “Weighing the value of the rewards against the cost of the annual fee to ensure they’re getting the most benefit.”
They Don’t Know That Some Credit Cards Charge Foreign Transaction Fees
“When traveling abroad, clients may not be aware that using their credit card for purchases can incur foreign transaction fees, typically around 3% of the transaction amount,” said Kovar.
Be sure to use a credit card that waives foreign transaction fees when traveling.
They Don’t Read the Fine Print Regarding Balance Transfers
Balance transfer offers can be attractive — and sometimes a smart move to make. But people don’t always understand them or the potentially costly consequences.
“While balance transfer offers can be tempting, clients may overlook the fine print, including transfer fees and promotional periods,” Kovar said. “It is encouraged to carefully review the terms and conditions before taking advantage of these offers.”
They Believe What The ‘Junk’ Mail Tells Them
“We have all read the clever marketing junk mail that assures you there is no need to pay more than 3% of your monthly balance,” said Dr. Erika Rasure Ph.D., chief financial wellness advisor at Beyond Finance. “It feels good and allows you to breathe a little, but that’s what creditors and banks want you to think because they make way more money from finance charges the longer you stick around. Pay all you can each month and get on top of that wave of debt.”
They Don’t Realize the Disturbing Truth About So-Called Fixed Rates
There is no credit card out that doesn’t have an annual percentage rate or APR. Often these are advertised as “fixed,” meaning they won’t change. But they actually can change, in some situations, and it’s your job to stay on top of this should it happen.
“You could miss a payment, and then, before you know it, you’re paying 24% APR instead of the 16% you signed,” Rasure said. “Sometimes, you could get a 30 or 45-day notice, but only occasionally. Keep an eye on your statements.”
They Don’t Know The Magic Number
With credit card debt there’s a magic ratio that many people don’t know about.
“This mathematical equation with credit card debt is called the ‘credit utilization ratio,'” Rasure said. “Essentially, this is the total available credit divided by the total amount of credit you use. Look at the limits of all your credit cards. Let’s say they equal up to $10,000. Now, look at how much you owe on all of them. If that total number is more than $3,000 (in this example), you are over the 30% ratio. Get it down because your FICO score is about to go down too.”
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This article originally appeared on GOBankingRates.com: I’m a Financial Advisor: 8 Things My Clients Don’t Know About Credit Cards
