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Wyandotte, Mich. — September 19, 2023 – With credit card debt at record levels, it’s important for individuals with less than stellar credit to use their credit cards carefully, both to avoid further debt and to repair their existing credit situation. Carma Peters, president and CEO of Michigan Legacy Credit Union, a not-for-profit financial cooperative serving members throughout Michigan via local branches and online-virtual banking platforms, advises consumers to be strategic with their credit cards to obtain a solid credit rating and, ultimately, long-term financial health.
Five tips on obtaining, using and paying off credit cards
- The best way to obtain a credit card when experiencing consumer debt is to establish a relationship with a financial institution and rebuild toward a track record of success. Peters notes that credit unions can make decisions locally, rather than through a rigid formula followed by large banks and can be a good place to start for those seeking to obtain their first credit card or to get a new card following a period of irregular payments. Speaking on her organization, Peters noted they have members with no credit score or scores below 580 who are still deemed eligible for some credit cards, albeit with low limits.
- There are two types of credit cards: A secured credit card is backed up by a savings account and an unsecured credit card is given regardless of whether or not there is an existing savings account. Consumers with poor credit may not be approved for an unsecured credit card. A secured credit card, backed by the individual’s savings account or that of a parent of friend, can increase one’s credit score and offer an interest rate of 3% to 5% above the savings account rate.
- DO THE MATH! A monthly balance of $1,000 a month at 18% interest can almost double the interest you pay if you are making the minimum payment. As the balance increases the interest increases significantly. Note that a credit union cannot charge more than 18% interest on a credit card, while some retail cards may charge as high as 32% interest.
- To understand the best credit card option, do an honest assessment of your financial discipline. Can you keep the balance below half of the credit limit? If yes, ask that your card limit be such that you can pay off half the balance with one paycheck. For example, if your limit is $1,000, that means you are able to pay off $500 with any paycheck. Don’t let the convenience of credit cards become a constant roadblock to long-term financial health. Use them as part of a monthly budget that aligns with your income and savings goals.
- READ THE FINE PRINT! Understand the rights, responsibilities and repercussions of possessing a particular credit card. Boring yes, but it can eliminate the shock of learning, for example, that if you do not safeguard your credit card information and willingly share it with others, you can be held liable for their unauthorized charges.
- Credit cards can be your friend: Despite their close ties to consumer debt, credit card debt isn’t all bad.
“Credit card debt can actually be good when you have high credit availability,” Peters said. “That occurs when you’ve accumulated available credit on a card that’s been opened for several years but have charged less than 50% of your credit limit. Surprisingly, available credit is the highest factor in your credit score.”
Teens and credit
When it comes to teens and credit cards, is there a perfect age to offer such financial responsibility?
When a teen starts to travel, work, or drive they may need emergency access to funds.
“A credit or debit card for a teen can be as much a convenience to the parent as it is the teen,” Peters said. “The best age can depend on a child’s maturity level in decision making, but at age 14 or 15, teens are entering high school and spending more time away from their parents when purchasing decisions are made.”
Peters offers parents some background for dealing with teens and money:
- If opting for a credit card, the child’s name can be on the card – but an adult is required to be on a credit card account for a minor until they turn 18.
- Set a reasonable financial limit on the child’s access to credit, if the account allows a differing amount for ‘family’ credit cards.
- Consider turning on transaction alerts to be on the lookout for unauthorized transactions or to monitor the teen’s spending.
- If a teen is given a debit card, ensure there is money in the account to cover the agreed upon expenses.
- Setting expectations and educating your teen is the best way to ensure they have great credit their entire lives.
Regarding mobile payment methods like Venmo, Peters says similar guidelines apply, adding new cautions.
“Everyone needs to be cautious when using Venmo and other apps like Cash App. Sharing purchasing information on social media platforms can tell a predator a lot about you, including how much money you spend, where you shop, dine, and other personal patterns that can tip a predator off as to where you might be found offline,” Peters said.
About Michigan Legacy Credit Union
Michigan Legacy Credit Union (MLCU) is a member-owned, not-for-profit financial cooperative serving members who live, work, worship, attend school, or own a business in the state of Michigan. Michigan Legacy Credit Union is committed to providing quality financial services at a competitive price, delivered professionally and efficiently while keeping member/owners and their needs first. For additional information on MLCU, visit: www.michiganlegacycu.org.