Credit cards have been around since the 1920s, right about the time Americans started their love affair with automobiles. Service stations, hotels and restaurants began offering credit cards when Americans began venturing out to a world beyond the convenience of their local banks.
By the 1950s, over 20,000 Americans carried the Diners Club card in their wallets. That success was followed by American Express and Bank of America, which both began offering credit cards in 1958. Jump forward 50 years and Americans could hardly imagine a world without credit cards. But that doesn’t mean we always use credit in the smartest ways.
A study at the Massachusetts Institute of Technology showed that people don’t perceive credit and cash in the same way and will pay twice as much for something purchased with credit. Researchers at the University of Pennsylvania have estimated that the typical cardholder pays an extra $200 a year in interest on a credit card balance while keeping a large amount of cash in savings or checking.
Tips on how to be smarter about credit cards:
- Look over credit card bills carefully. Taking a few minutes to look at the fine print can save a cardholder money in the long run. Recent credit card legislation stipulates that lenders must disclose more of the long term costs of credit, such as how much interest can accrue when only the minimal balance is paid. But consumers should do the math and make purchases with the long-term costs in mind.
- Credit cards make it easy to track spending, so consumers should pay close attention to what goes on the bill every month. It doesn’t make sense to carry a balance on lattes and lunch.
- Get a credit report and make sure the facts are correct. Credit scores determine not only a consumer’s credit worthiness, but also the interest rate that will be paid on loans. Credit ratings and reports are maintained by three main credit reporting agencies and you are entitled to one free credit report from each agency every year. You should obtain and compare your report from each agency. There are several companies online offering free credit reports, but be sure to read the fine print before giving any website your information.
- Make an effort to pay off credit balances, starting with those carrying the high interest rates. By paying a little extra each month, you can chip away at debt and improve credit scores. However, financial planners warn consumers not to close accounts once they are paid off. A long history of good credit with many accounts is what credit scores are based on.