Money Management

It’s time to break that cycle. 

If you’re carrying a balance on one or more credit cards, you’re in good company. As of the fourth quarter of 2022, U.S. credit card balances reached $930 billion, according to data from TransUnion. That’s a massive jump from a year prior, when total U.S. credit card balances were at $785 billion.

One reason credit card debt may have soared in 2022 boils down to inflation. Living costs were elevated from the start of the year through the end of it. And many consumers had to turn to credit cards when their paychecks fell short and they didn’t have a savings account to tap.

But the sad reality is that credit card debt is dangerous to your finances. First of all, the longer you hold it, the more it’s apt to cost you in the form of interest charges. Also, having too much credit card debt relative to your total credit card limit could cause damage to your credit score. That means you might end up in a situation where you can’t borrow money affordably the next time a financial emergency strikes.

If you’re frustrated by the fact that you’re still in debt, you should know that there are steps you can take to bust out of that cycle. But you’ll need to break these dangerous habits first.

1. Only making your minimum payments

If you make your minimum monthly credit card payment, you’ll be considered timely. So you may be inclined to just stick to those minimums and call it a day. But doing that will only cause your debt to drag out longer. Instead, cut some spending or pick up a side job so you’re able to free up money to chip away at your total balance — and not just simply satisfy those minimum monthly payment requirements.

2. Not transferring your balances to a card with a lower interest rate

It’s possible to have credit card debt but still have a pretty good credit score. And if that’s the case, it pays to look at a balance transfer. Many balance transfer offers come with a 0% introductory APR, which gives you a reprieve from racking up interest for a period of time while you work to pay your debt off. If you leave your balances where they are — on cards charging a boatload of interest — you might end up making the problem worse.

3. Applying for new credit cards while your debt lingers

When you’re already struggling with credit card debt, the last thing you want is the opportunity to charge even more expenses on credit cards. So if that’s the situation you’re in, do try to refrain from applying for new credit cards (other than a balance transfer offer) until your balance is whittled down.

Credit card debt isn’t an uncommon thing. But it’s also not a pleasant thing. And in many cases, it can be devastatingly costly. So if you’re eager to get out of debt, start making more than your minimum payments, look into lowering the interest rate on your balances, and steer clear of new credit cards, no matter how enticing the offers, until your circumstances improve.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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Are you in the black or in the red? 

If you’re not rich (and let’s face it, most of us aren’t!), you may not think you have a net worth or that it’s worthwhile to know that number. On the contrary, calculating your net worth is a way to see your own personal finance “big picture.” Let’s take a look at how you can find out your own net worth, why it matters, and why one financial guru warns Americans to be careful when it comes to figuring out that magic number.

The net worth formula

Your net worth equals what you own that has cash value, less what you owe to creditors. In other words, assets minus liabilities.

Your assets may include a wide range of property value, cash, and investments. If you own a home, look at how much you owe on the mortgage loan versus the property’s market value. For example, if your home is worth $300,000 and you have $240,000 left on the mortgage, your home is adding $60,000 to your net worth. Check out how much money you have in your bank accounts; that cash is an asset. If you have $50,000 in your IRA account or 401(k) plan, that’s an asset, too.

The less fun part of net worth math is looking at your liabilities. This is the money you owe others, often creditors. Going back to your mortgage, if you still owe $240,000 on it, that’s a liability. If you owe money on your credit cards, same thing. Got a personal loan you’re paying off? Bingo.

Once you’ve got both numbers, subtract your liabilities from your assets. Don’t be discouraged if the number isn’t as high as you might hope, or if you’re in the negative. Many people are, and your net worth will fluctuate over time. As you get older, it will likely trend upward as you grow your earning potential and pay down debts, like that mortgage loan. You might also be able to put more money aside in your savings account and increase your contributions to your retirement accounts.

There is one potential pitfall of basing the bulk of your net worth on one or two major assets, though.

A cautionary tale about net worth

Financial guru Suze Orman had some wise words about net worth in a recent episode of her podcast, noting that “if you calculate it incorrectly, you could end up in a whole lot of trouble.” Orman had some recent examples from listeners to illustrate this point.

She received an email from a couple who own their home outright and had counted the value of the house among their assets to become part of their net worth. Unfortunately, they live in Ohio and have been impacted by the recent train derailment disaster from earlier this year. Thanks to this unforeseeable event, the home is now basically worthless, and the couple’s plan to sell it and move elsewhere for retirement is in shambles. They’ll have to wait (and no one knows for how long) to see what happens with various legal actions to help the people of East Palestine.

Orman discussed other followers who are facing the loss of homes due to extreme weather as well. The upshot is that anything can happen to your home at any time, and the only way to protect yourself is to make sure you have the right homeowners insurance coverage. In some cases, you’ll know ahead of time that your home is in an area prone to weather events like hurricanes or wildfires. But for the couple from Ohio, there was no way to know that a toxic chemical spill from a rail disaster would ruin their plans to sell their home and move someday.

Diversify your assets

Ultimately, per Orman, the best way to ensure that your net worth isn’t lost in such a quick and devastating fashion is to diversify. It’s okay to count your home equity among your assets, but make sure it’s not your only one.

Orman is a big fan of government bonds; you could put your cash into those, as well as certificates of deposit (CDs), a money market account, and even a trusty high-yield savings account. Your money should be safe in all of these as long as you’re within FDIC limits, and keeping your cash protected in this way can give you more peace of mind that you won’t be out of options if something happens to your home.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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If you pay your bill in full, there’s no better way to make purchases. 

At first, the idea of paying for everything with credit cards might sound like a bad idea. There are so many horror stories about people who ended up trapped in credit card debt for years. Shouldn’t you be trying to spend less on your credit cards, not more?

Not quite. While you do need to be careful when using credit cards, they offer big advantages over other payment methods, like debit cards and cash. The key is sticking to your normal spending habits, only charging what you can afford, and paying your bill in full every month. If you do that, you’ll never end up in debt or paying interest, and you’ll be able to take advantage of these credit card benefits.

1. Rewards and bonuses

Many credit cards offer rewards and bonuses, and these can save you lots of money on your regular expenses. For example, there are rewards credit cards that earn a flat rate of 2% back on purchases. If you spend $30,000 per year, that’s $600 in cash back, just for paying by credit card. Other cards offer higher rates in bonus categories, such as 4% back on groceries or gas.

In addition, many of these rewards cards also offer sign-up bonuses for new cardholders. This is an incentive you earn if you complete spending requirements, such as spending $2,000 in the first three months. Most sign-up bonuses are worth at least $100, and some of the best sign-up bonuses are worth $500 or more.

2. Complimentary protections

Paying with your credit card could also get you complimentary protections on eligible purchases. These protections depend on the card, but here are some examples that many cards offer:

Purchase protection covering new purchases that are damaged or stolen (usually for the first 90 or 120 days)Extended warranty coverage that extends the manufacturer’s warranty by a year or moreCellphone insurance covering damage or theft if you pay your monthly wireless bill with your credit cardTravel protections, such as lost and delayed luggage reimbursement and trip delay insurance

For an example of how credit card protections can work, let’s say you buy a new iPad. A few weeks later, it gets stolen. If you paid for it with a card that offers purchase protection, you could file a claim to get your money back.

Protections like these are why you should always make big purchases and travel purchases with a credit card. You can see which protections a card offers in the guide to benefits or on its web page.

Read More: 4 Reasons to Delete Your Credit Cards From Amazon

3. Build your credit score

Using a credit card regularly is a great way to improve your credit score. Each time you pay with a credit card, you’re technically borrowing money. When you make a payment, you build your payment history, the most important part of your credit score. And if you pay in full by the due date, you won’t get charged any interest.

If you do that every month, you’ll work your way toward an excellent credit score. That will help you qualify for the lowest interest rates on loans and credit cards with more benefits. There are all kinds of other ways your credit score affects your life, too. For example, in most states, your credit score can affect your insurance rates. In fact, car insurance costs for drivers with poor credit are over double those for drivers with excellent credit.

4. A safety net in case something goes wrong with a purchase

One of the nice things about paying by credit card is that you can get your money back if there are issues with a purchase. You need to try and resolve things with the merchant first. But if the merchant is unhelpful, you can dispute the transaction with your credit card.

Your card issuer will immediately give you a temporary credit for the transaction. It will then investigate the issue, and if it finds that you’re in the right, that temporary credit becomes permanent. To be fair, this benefit isn’t exclusive to credit cards, as you can dispute transactions made on a debit card, too.

Don’t let their controversial reputation fool you. Even though credit cards have their risks, those risks are entirely avoidable. Just to reiterate, what makes all the difference are your spending and payment habits. It’s extremely important that you spend normally with your credit cards and always pay in full. If you do that, then you’re going to come out ahead with the rewards, bonuses, and other perks that credit cards offer.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Lyle Daly has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon.com. The Motley Fool has a disclosure policy.

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