As members of GenFKD, we are constantly warned of the evils of credit cards. Yet, the warnings are not deterring us much at all. Having many credit cards seems to be a pretty good deal these days.
From the Wall Street Journal:
When Kyle Allen gets home from work each day, he heads straight for his mailbox. “It does give me a rush,” says the 29-year-old financial analyst from Orlando.
What he hopes to find is yet another offer for a new credit card. He and his wife together have 40 of them and have earned, so far, 1,492,500 rewards points. They have used the points in an almost-completed quest to visit each destination named in the chorus of the Beach Boys song “Kokomo.”
Yes, you read that right. Forty credit cards for this frequent-flying, financially adventurous couple.
Though at first sight this behavior seems reckless, a stronger glance will bring about a good example of being financially shrewd. This article goes on to list several more of our fellow millennials’ apparent obsessions with collecting credit cards.
Contrary to popular belief, owning a whole bunch of credit cards does not negatively affect credit scores all that much. What’s important is paying them off and having a utilization ratio at around or below 30 percent, consistently. The utilization ratio is what you owe on your credit cards divided by the total credit card limits.
For example, if you have $10,000 total in credit card limits, and when you add your credit card balances it comes out to $2,500, your utilization ratio is 25 percent. Having several credit cards can help increase your total credit limit, which will help improve the utilization ratio by increasing the denominator, thus decreasing the ratio. For those struggling: half of a pie is larger than one-quarter of a pie. Moving on.
Though 40 cards is almost excessive, imagine that ratio! On top of that, most of these credit cards are riddled with sweet rewards such as cash back on purchases, flyer miles and hotel nights. Not a bad method of acquiring some financial swag.
Cards compete for your business
Sure, this method can lead to some pretty bad outcomes, but the data shows that most people are not as illiterate as we think when it comes to credit cards. According to Consumer Finance Survey data compiled in the book Consumer Credit and the American Economy, since the introduction of credit cards in the early ’70s, an average of 33 percent of the highest income group has had credit card debt that goes month to month, or revolving credit card debt. But, only 5 percent of the lowest income group has a revolving debt.
Today, though there are no caps on interest rates, the interest rates are kept low due to the plethora of credit cards that are in the market. The credit cards in our wallets are in fierce competition for our business.
As a result, only one in four cards have annual fees, and those that do are compensating with their awesome rewards program. Additionally, even with the widespread availability to credit since the ’70s, the annual percentage rate (APR) has actually decreased because of competition and better technology assessing consumer risk.
We don’t intend to tell you how to live your life or even give any recommendations on how to use credit cards. Financial literacy is often acquired through the “hard knocks” method. What’s more, is that for the most part, credit cards are used in a way that makes us better off, even though we get into a little debt. If every credit card you subscribe to gets maxed out by purchasing frivolous nonsense, you need a therapist, not a financial literacy course.
Today, there are resources such as WalletHub that allow us to compare cards to choose the ones best suited to our needs and desires. However, knowing the interest rate on our credit cards could be useful, but not totally necessary. If we keep our utilization ratios low and pay our debts off in a timely fashion, the 15 or 20 percent APR will be only a few pennies on the dollar every month. It’s a small price to pay for emergencies, buying holiday gifts or out-of-the-blue vacation destinations — especially today, when the rewards are so good.
Graph of historical interest rates is from NerdWallet.
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