Think Before You Swipe

Think about a time you experienced a troublesome financial situation.

Did you experience mental stress? Was your physical health affected? If so, you’re not alone. Studies have shown that financial stress can affect your health, your productivity, and your quality of life.1

That’s why, at UC, we’re expanding our definition of the word “wellness”—because there’s more to it than physical health. This is the first in a series of FOCUS articles designed to help you boost your physical, mental, and financial wellness. In this issue, we’re zeroing in on credit cards.

Proceed with Caution

Credit cards are a double-edged sword. While they can be a valuable financial tool, credit cards can also make it easier to get into financial hot water. What’s more, researchers from Northwestern University and McGill University have discovered that high levels of debt are linked with stress, depression, and even higher blood pressure.2

But there are smart ways to make the most of the benefits credit cards can offer, while keeping their risks in check. Here are seven quick tips to help you learn how.

Seven Smart Credit Card Moves

  1. Build credit wisely. Building your credit with credit cards can be a good idea, but use caution when you incur debt. A good rule of thumb is that your total debt payments—including mortgage, car loans, student loans, and credit card payments—should account for no more than 36% of your income.3 And while some California banks and mortgage brokers may accept a higher debt-to-income ratio, adding more debt than you can handle could jeopardize your long-term financial goals, such as retirement or college savings.
  2. Check credit reports regularly. Your credit information is compiled by three credit-reporting agencies—TransUnion, Experian, and Equifax. Those reports form the basis of your credit score, which potential lenders use to make decisions about lending to you. Errors in your credit report could lead to a lower credit score, which could disqualify you from more attractive interest rates—or from borrowing at all. You can request a free copy of each of your three reports once a year at AnnualCreditReport.com.
  3. Manage credit well. The most important factors on a credit report are your debt-to-income ratio and your payment history, so keep your debt levels low and make on-time payments to help you look more attractive to lenders. Canceling an older card or closing down an account that you don’t use much can also lower your credit score. The reason: Lenders care about your credit history and the longer that history the better.
  4. Read policy agreements. Not all credit cards are created equal. Some charge annual fees, while others charge fees for balance transfers, cash advances, exceeding your credit limit, or other actions. To keep your fees manageable, choose a card with rates and fee structures that match your expected behavior. To make these decisions, you’ll need to read and understand the issuer’s credit card policy agreement. Look for how and when your interest rate might increase, what actions carry fees, and how the issuer will charge for any overseas transactions.
  5. Use cards safely. Credit card fraud and identity theft are major risks for the modern-day consumer. You might not be liable for fraudulent charges on your cards, but you still have a responsibility to keep your information safe. Reduce the risk of fraud by reviewing your credit card statements at least once a month. Keep your receipts in a safe place so you can compare them with your monthly statement. Notify your card issuer if you spot any transactions that you don’t recognize and report a lost or stolen card right away.
  6. Maximize rewards. Credit card rewards—such as points toward merchandise, airline miles, or access to exclusive clubs—have become popular with consumers. But in many cases, a card that offers cash rewards provides the most flexibility. You can use cash rewards to pay down your debt or, in some cases, have that cash automatically deposited in an IRA or savings account. That way, your credit card purchases can actually help you accomplish other financial goals.
  7. Pay off balances strategically. Thanks to the Credit CARD Act of 2009, credit card statements now show cardholders how long it will take to pay down their balance if they only make the minimum payment—not to mention how much more it will cost. Naturally, the faster you can pay off those balances, the less debt will cost you. If you can’t pay a card balance in full each month, review your budget to determine how much you can earmark for that payment without sacrificing other important long-term goals, such as saving for retirement.

Remember that although we might use them like cash, credit cards are not just a tool for transactions. They’re another debt product that can have a big impact on your financial goals. Take the time to consider credit cards in the context of your overall budget, debt picture, and other financial priorities, and you can better use cards to your advantage.

 

1 “Stressed Retirement Plan Participants Carry a Cost,” Plansponsor.com, August 2014.
2 “The high price of debt: Household financial debt and its impact on mental and physical health,” Sweet, McDade, Adam, and Nandi, Social Science and Medicine, August 2013.
3 “How much house can you buy?” Bankrate.com, 2014.

TransUnion, Experian, Equifax, AnnualCreditReport.com, NerdWallet, CardHub and Fidelity Investments are independent entities and are not legally affiliated.

 

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