Guest post by Dale Gunther
‘Tis the season when holiday cheer fills the air—and consumers begin wracking up the charges on their credit cards as Christmas shopping commences. After all, credit cards are more convenient than carrying around large wads of cash, and you might as well get rewards for spending, right?
That is the general consensus among the American public. A report by consulting firm Aite Group found that as a percentage of retail spending, cash will decline from an already-low 12.6 percent down into the single digits by 2015. The trend is expected to continue as plastic becomes more prevalent.
Credit cards are handy. They allow you to make online purchases and prove to be a useful budgeting tool by providing line-by-line transaction information via a monthly statement. They give you cash back or let you choose from rewards ranging from gift cards to airline tickets. They help build credit and can be life-savers in emergency situations. Credit cards even protect you when you’re a victim of fraud, with liability limited to $50 or less when theft is reported promptly.
But credit cards can be dangerous. When purchases are unplanned and unbudgeted for, debt can quickly become overwhelming. Consumer Reports recently reported that only half of Americans pay off their credit card balances in full each month. With many balances carrying double-digit interest rates, consumers dig themselves deeper and deeper into debt. According to credit reporting agency TransUnion, the average credit card debt is about $4,700 per cardholder. TransUnion also reports that credit card delinquency (defined as more than 30 days past due) is 0.71 percent—among the lowest rates in the past 16 years, but an increase over second-quarter numbers, suggesting that more high-risk consumers are opening credit cards.
How to avoid the woes that inevitably come with credit card debt? Simple: don’t spend more than you have. Plan for purchases. Understand your capacity to repay.
It really is that simple.
I’ll never forget my first lesson in responsible credit. As a young boy in the late 1940s, some friends and I stopped by the local drugstore to buy a drink at the soda fountain. When I realized I didn’t have enough money for my coveted Ironport soda, my friends suggested I “just charge it.” Back then, that meant having the cashier commit my debt to a paper ledger. What a novel idea!
I enjoyed the soda and walked out of the store with a big smile on my face. My smile promptly disappeared when I told my parents about the incident. My father marched me straight back to the drugstore and had me pay off my debt.
That day, I learned to be a responsible spender. I learned that if I didn’t have the money then, I shouldn’t make the purchase, especially for something that was certainly a “want” rather than a “need.”
Some people have learned this same lesson only after feeling the heavy weight of debt resting on their shoulders. If you find yourself in this situation, take immediate steps to fix the problem: stop charging. If you have to cut up your credit card(s) to cut out the temptation, do so. Eliminate any unnecessary spending until you have paid off your bill in full. Let creditors know in advance if you can’t make your monthly payment on time and they may be willing to waive late fees and show some lenience if you are a first-time offender.
It can be difficult to practice restraint during this time of year, as we have become conditioned to show our love through the giving of material gifts. The sentiments of affection and goodwill are constructive; the practice of buying gifts one can’t afford is destructive. Unwise use of credit can bring short-term satisfaction, but often results in long-term regret.
Like many things in life, credit cards are a useful tool if used responsibly and in moderation. This Christmas, give a gift to yourself and stay out of debt.
Dale Gunther is vice chairman of the board of People’s Utah Bancorp, the holding company for Bank of American Fork , which is an Equal Housing Lender and Member FDIC. At the start of his 16-year tenure as CEO at Bank of American Fork, the bank had two branches and $80 million in assets; it now has 13 offices and more than $860 million in assets. Dale has served as chairman of the Utah Bankers Association and currently serves as an American Fork city councilman. This article should not be considered legal or investment advice. Seek legal and investment advice from your own qualified professional.