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Credit

National averages for credit card and other consumer debt can be a good barometer of consumers’ financial capacity and goals. For instance, when debt decreases, Americans, as a whole, may be spending less and saving more. Of course, that’s a good thing.

So, when SmartAsset released its average credit card debt study recently, we took notice. The survey looked at median individual income and credit card data from 2006 to 2016. It even broke down the data by state!

trend

What did the survey find? Here are some of the topline results and what they might mean for consumers like you:

Americans were dropping credit card debt… but now they’re reversing that trend.

The data show that from 2006 to 2015, the average total credit card debt went from about $3,175 per person to $2,800 per person. Total credit card debt dropped — in every region except Virginia, Maryland, and Washington, D.C. — during this time period.

What does that 11.6% decrease mean? It’s hard to say exactly. But it could have been a result of the financial crisis, and people understanding how dangerous credit card debt can be during a time of personal financial upheaval.

During this time, though, there was a peak in the average credit card debt. In 2008, the average debt was $3,670, and the average American had debt equal to about 14% of their annual income! From that high point, we started cutting back on credit card debt quickly and efficiently. This is definitely a good thing.

So for several years, Americans were dropping debt at a significant rate. But then, a new trend happened.

The average credit card debt bottomed out at $2,730 in 2014, bouncing back up to $2,800 in 2015. Over this same time period, the total national credit card debt rose from $733 billion to $799 billion. So, is this the new normal?

It’s hard to say. But the report speculates that the Great Recession incentivized Americans to lower their credit card debt. But once the recession turned around, Americans seem to have forgotten the struggle and gone back to their old ways… taking on significant amounts of credit card debt.

What does it mean for consumers?

Boiling complex statistics, in a survey like this one, down to a few talking points is risky. The challenge is to avoid reading too much into the results. With that said, I think there are a few lessons that financially savvy consumers could take away from this study.

 

It’s all too easy to go back to bad habits.

What we see here in these trends is that, when given a big enough push, Americans are capable of buckling down and paying off debt. In some states, credit card debt levels shrunk by 30% or more, during and right after the Great Recession!

Necessity tends to breed discipline, in finances as in everything else. But when that necessity is no longer spurring you on, what happens? It’s way too easy to go back to former bad habits.

Time will tell whether the recent uptick in debt levels is a trend that will continue. But it does show that once the worst of the crisis is over, people may be willing to slide back to where they were before.

If you really want to change your habits, whether in the realm of personal finance, your health, or elsewhere, you have to keep going. And that means even after the crisis that spurred your change has passed!

 

We should all be prepared for the worst, at any time.

If consumers had known beforehand that the Great Recession was coming, do you think they would have had thousands of dollars in credit card debt lying around? For many, probably not!

It’s easy to live large when things are good, and not to worry too much about things like credit card debt. After all, you can afford the payments, so what’s the big deal? The problem is that you never know what’s just around the bend.

Illness, stock market crashes, job loss, and other disasters can strike at any time. While you don’t want to live in a doom-and-gloom mindset, it’s best to be prepared. And, financially, this means being as debt-free as possible and having emergency savings available.

 

Focusing on staying out of credit card debt is still important.

Personal finance blogs like this one have been around for decades now, but many people still need to go back to the basics. One of those basics is the importance of paying off credit card debt.

Sure, sometimes taking on credit card debt can be justified. But it’s important to pay it off as quickly and efficiently as possible. Otherwise, you run the risk of trying to pay down such debt while you’re already in the middle of a crisis.

So, what’s your story from the Great Recession? Did your credit card debt go down? Are you letting it slide back up again? Tell us in the comments.

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The best credit card deals are often spoiled by an annual fee. Annual fees can range from about $50 to $2,500, with the high end reserved for the super-select American Express Centurion Card (the “black card”). In return for this fee, credit card issuers provide a range of benefits beyond what typical no-fee cards offer. These include perks like free gifts, a travel agency, and a personal concierge.

From the issuer’s perspective, an annual fee makes a card more exclusive. A higher quality customer (in terms of creditworthiness and income) will apply for these cards, and these customers will spend more on their credit cards than typical non-business credit card users.

Issuers also utilize annual fees for certain credit card products — often ones catering to lower-quality consumers. This includes those with poor credit scores, who may not be able to qualify for regular credit cards. In this case, the annual fee helps reduce risk for the issuer, even if just barely.

More importantly, issuers charge fees for some below-average or sub-prime credit cards for a very simple reason: because they can. These customers have few options if they desperately need a credit card, and will resort to paying an annual fee in order to get the card in their wallet.

For most cards charging an annual fee, the first year’s fee is waived as part of the introductory offer. So, be sure to check the terms and conditions to determine if you’ll need to pay your fee up front, or on the first anniversary of your membership.

The value of the annual fee

Whether or not a credit card is worth the annual fee depends on the conditions.

The first condition pertains to the benefits you receive for the card in exchange for that annual fee. If the benefits you receive are worth more to you than the cash in your pocket would be, if you will use those benefits, and if the benefits wouldn’t be cheaper through other avenues, the annual fee might be worthwhile. In some cases, like for those with a substandard credit history, the benefit you receive of just having a credit card to use may be worth the annual fee.

The important thing here is to weight the credit card’s benefits against its annual fee. Will you get more out of the benefits than you pay to use the card each year? And will you actually remember to use those benefits so that you make the most of this annual fee expense?

For instance, if you’re looking at a credit card with a $50 annual fee and flat-rate 1.5% cash back, how much do you need to spend on the card to even earn back your annual fee? About $3,300. If you’re not going to spend more than that on your credit card in a year, the annual fee isn’t worthwhile.

Of course, these calculations can get more complicated when it comes to cards with variable cash back or rewards points for different types of spending. And if you carry a balance on the card, even for part of the year, you’re likely to pay more in interest charges than you’ll be able to earn back in rewards. Add that to the annual fee, and you could be looking at a pretty hefty spend just to be able to use a particular credit card.

You’ll also want to consider the card’s other benefits, such as concierge services, travel agencies, and special members-only events. If you’ll use these services, they may be worth paying a small annual fee for. But you’ll often find that these services don’t offer you anything you couldn’t do for yourself online.

If you’re considering paying an annual credit card fee just for the services the card offers, it’s important that you shop around. See how much you’d pay for similar concierge or travel agency services. Or look into how much you would pay for car rental insurance, if that’s a benefit that the card offers.

You may not even need to pay for these services and benefits elsewhere. Instead, you might be able to find another credit card that offers these benefits for a lower annual fee — or for no annual fee at all.

In some cases, a credit card annual fee is not worthwhile, but at the same time, for some people an annual fee is not an automatic deal breaker. If you’re looking at a very high-rewards card that you’ll pay off each month and will get major points-based or cash-back benefits from, the annual fee may be worth your while.

Let’s say, for instance, that you choose to use a cash-back credit card with a $95 annual fee. The card offers 6% cash back on your first $6,000 of supermarket spending each year, plus 1% cash back on all other purchases. If you meet the $6,000 grocery spending threshold, that’s $360 back. Then let’s say you put another $6,000 of other spending on the card. That’s a total of $420 back for the year, which clearly outweighs the credit card’s annual fee.

As long as you make these calculations before you decide to take on a credit card with an annual fee, you may find that this is a good option for you.

However, if you’re looking at a card with annual fee just because of additional, non-points or cash-back benefits, you may want to reconsider. Many no-fee cards offer concierge services, member benefits, car rental insurance, and similar perks to their members.

So what if you have very low credit and can’t find a card without an annual fee? You might consider starting off with a secured credit card, instead, to begin building your credit. Once your credit improves, you can move over to a no-fee credit card with decent rewards.

Some credit cards with annual fees

For an overview of the typical credit card featuring annual fees, here is a list of some of the most popular. For the cards that are listed as not having an introductory annual fee for the first year, new customers might be able to negotiate this and avoid paying the annual fee once. The cards that offer an introductory annual fee of $0 for the first year, then after that introductory period the annual fee is charged.*

Credit Card Annual Fee Introductory Annual Fee for the First Year*
Blue Cash Preferred® Card from American Express $95 No
Southwest Rapid Rewards® Premier Card $99 No
United MileagePlus® Explorer Card $95 Yes
Citi® Hilton HHonorsTM Visa Signature® Card $0 N/A
Gold Delta SkyMiles® Credit Card $95 Yes

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One of the best things you can do to build awareness of your financial condition is to view your credit report. Your financial condition — as perceived by potential lenders — can cost or save you thousands of extra dollars throughout your credit repayments, such as the life of a mortgage, for instance.

Credit Card

You can get them for free these days, too. In fact, you are entitled to three credit reports, one from each of the three major reporting bureaus, each year. You can either get them all at once or visit annualcreditreport.com (the government’s official free credit report source) three times a year, to space the credit reports out evenly. Personally, I prefer the latter approach.

What You’ll Probably Find

Well, if your credit report is anything like mine, it contains a list of credit cards with basic information like partial account numbers, a credit limit, and payment history. Some probably date back to college, when you signed up for a credit card in exchange for a free t-shirt at freshman orientation. You may not even know where to find the actual credit card anymore.

For example, here’s a snapshot of one of my own records. This card account hasn’t been touched since 2011, but here it is, on my 2017 report:

old cc sc

There are a number of reasons that I keep this card active, though.

Reason 1. It’s one of my oldest accounts. I opened this card back in 2005 when I was a college freshman (cliché, I know). It’s the second oldest credit card I have, and even though I don’t use it, I like to keep my credit score’s Average Age of Accounts as high as possible.

Average Age of Accounts and How Your Credit Score Is Calculated

Were I to cancel this card, that number — an average of the credit length of all my revolving accounts — would go down. No, it wouldn’t be substantial, but I would still rather avoid it unless necessary. Which leads me to…

Reason 2. It doesn’t have an annual fee. Since I don’t use this credit card, it just sits around collecting dust (actually, I shredded it years ago, so that’s just a figure of speech). It doesn’t have any sort of fees involved, so I’m alright with that. However, if I were being charged an annual fee to hold the account, I would close it faster than you could say “Semi-Annual Sale.”

Many rewards credit cards do have annual fees; whether they’re worth it or not is up to you. If you’re using the card and earning great cash back (that more than negates the fee), go for it. If not, then you’re just throwing money away. And with a mere $1,000 credit limit impacting my credit utilization ratio, it wouldn’t be worth my cash to keep the account open.

Before closing an unused card due just to an annual fee, though, try calling the issuer. Sometimes, they will be willing to waive the cost for you — at least for that year — just to retain your account. Others may have a version of the card that doesn’t have an annual fee, and would happily switch your account over to that product instead. It would keep the benefits of the account on your credit, while avoiding the unnecessary drain of a fee every 12 months. Win-win.

Reason 3. I am still paying off balances on other cards. That credit utilization I just mentioned? This is where that comes into play.

If you don’t hold balances on any of your other accounts (i.e.: you have no credit card debt), closing a card like this won’t really impact you. I, on the other hand, am still paying off some old credit card balances… so closing an account with a $1,000 limit would ding my credit score in yet another way.

This is because of my debt-to-available credit ratio. Also called credit utilization, this is the ratio of how much debt you owe (your balance) versus your line of credit (the available credit). Let’s look at an example.

  • If you have three credit cards, adding up to a total of $10,000 in available credit, but keep a $0 balance on each one, closing a $1,000 limit card won’t hurt. Your utilization will remain at 0%.
  • However, if you have $10,000 in credit but hold balances adding up to in $5,000 in debt, your ratio is already 50%. If you close down that $1,000 card with a $0 balance, your debt-to-credit ratio just jumped up to 55.6%!

So, take into account where your credit already stands before closing an unused card. If you don’t hold any debt, you’re probably fine to close the card and won’t notice much of a difference. If you need that line of credit to boost your utilization, or need the account to factor into your average age of accounts, perhaps it’s worth keeping the plastic around.

Related: Millennials Aren’t Using Credit… But Should They?

Still Want to Close the Card?

So, the above reasons don’t impact you, and you’re still ready to cut up some cards? Go right on ahead… but take these three steps into account.

Step 1. Save your best, oldest card. Find the credit card with the longest, cleanest history, and keep this card. If you don’t know where the credit card is, call the company to update your address information and ask them to send you a new card. This probably isn’t the card you want to use moving forward, though. Just keep the credit history clean, and spend on/earn rebates with newer cards.

Step 2. Close all other inactive accounts. You can do this by calling the phone numbers that are listed with the information for each card. If you have an active card with the same company, ask to move your credit limit from the inactive card to the active card, and then close the inactive card. This will keep your credit history long and your credit report short.

Step 3. Choose the best card to use. If you are struggling to get out of debt, you should choose a low-interest card with no perks. If you are managing your money well, this should be the card that offers the best perks (like cash back, airline miles, etc.) for you and your lifestyle.

Try looking through lists of cards like

You may not have to apply for a new card if you already have one by the same lender; just call customer service and ask to convert your card. They may have some additional options for you, too.

How to Get Your (Legitimately) Free Credit Report

If you want to improve your credit score and get the lowest mortgage rates, the bottom line is you want to keep your oldest, cleanest credit card to show a long, solid history of responsible credit. You also want to have a low debt-to-income ratio and credit utilization ratio (by paying off your balances every month).

Doing these will help you to improve your credit score, qualify for the best interest rates, and receive some of the best credit products (such as rewards credit cards).

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AMEX Blue Cash PreferredWhen the Credit Card Act was passed years ago, many thought it would be the end of credit card rewards programs. Despite increased costs of operations, credit card issuers continue to beef up their attempts to attract new customers, with bonuses for signing up and growing perks. The best cards you’ll find today seem to include the same 1% cash back on most purchases with 5% cash back for select spending categories that change every three months. The Blue Cash Preferred® Card from American Express is a nice surprise, offering a welcome bonus and up to 6% cash back on everyday purchases. It’s simple and straightforward with no rotating reward categories and no enrollment required.

American Express offers new cardholders of the Blue Cash Preferred® Card from American Express a welcome bonus. They’ll give you 150 Reward Dollars after you use your card to make $1,000 in eligible purchases in the first 3 months of card membership. The welcome bonus offer is not available to applicants who have had this product within the last 12 months, or any other consumer Blue Cash® Card account within the last 90 days.

Learn More: Compare this and other rewards cards, and apply online HERE.

Also included with this offer is a 0% introductory APR on purchases and balance transfers for 12 months. Once that introductory period has expired, the purchase APR will vary with the market based on the prime rate. It is currently at 13.49% to 23.49% variable, based on your creditworthiness.

The best feature of the Blue Cash Preferred® Card from American Express is its cash back rewards program. This is truly unmatched right now, and every eligible purchase earns cash back in the following amounts:

  • 6 percent cash back at US supermarkets up to $6,000 per year in purchases
  • 3 percent cash back on gasoline at US gas stations
  • 3 percent cash back at select US department stores
  • 1 percent cash back on other purchases
  • Terms and limitations apply.

Your cash back is received in the form of Reward Dollars that can be redeemed as a statement credit and is earned only on eligible purchases. Unlike previous versions of the Blue Cash Card, where rewards could be redeemed only once a year, cardholders can redeem rewards as soon as they’ve accumulated $25 or more.

Unfortunately, the Blue Cash Preferred® Card from American Express is not free. It comes with a $95 annual fee. However, considering the savings at the grocery store and gas pump, this card can potentially save you hundreds of dollars every year, even with the annual fee.

The Blue Cash Preferred® Card from American Express — when you add up the 150 Reward Dollars and the cash back program — might be one of the most rewarding credit cards offered by American Express. Be sure to review the terms and conditions for restrictions that apply to this offer. Terms and restrictions apply.

learn_more

Disclaimer: This content is not provided or commissioned by American Express. Opinions expressed here are author’s alone, not those of American Express, and have not been reviewed, approved or otherwise endorsed by American Express. This site may be compensated through American Express Affiliate Program.

Important Note! The information in this article is believed to be accurate as of the date it was written. Please keep in mind that credit card offers change frequently. Therefore, we cannot guarantee the accuracy of the information in this article. Please verify all terms and conditions of any credit card prior to applying.

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