What's Your Credit Card Spending Style?
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A lot of experts predicted that consumers would cut back on credit card spending this year. I'd even bet that consumer behavior analysts felt they were making pretty safe predictions. And honestly, I kind of agreed with them.
I can think of three reasons we should all be skittish about flashing our plastic. For starters, we had the increase in payroll taxes at the beginning of this year. That alone can give people the spending yips for a while. Second, there was all that business about delayed tax refunds. Third, there's the still-sluggish economy. It's improving, but pretty darn slowly.
But guess what? Consumers are not behaving according to plan. They're using their credit cards at a steady rate. A recent report by First Data showed that credit card sales even increased 8.1% in February. This is especially unusual because people tend to cut back on spending for a few months after the holidays.
Now, I suspect that some of this credit card usage is by those who actually were affected by the tax increase or the delayed tax refunds. They need their credit cards to cover the gap between take-home pay and household expenses.
But on a positive note, a recent report from the American Banker's Association showed that consumers who are carrying a balance are more likely to pay on time now. Delinquencies have gone way down, which is awesome, because a late payment can really drag down your FICO score. (See also: 10 Surprising Ways to Negatively Affect Your Credit Score)
Now, stats can turn around quickly, so I'm not saying this is how consumers will behave going forward. But I do spend a lot of time talking with folks about their credit cards. I get a sense that our spending behavior, while not quite as predictable as we may have thought, kind of falls into one of the following four categories.
You keep your credit card balances low, and you always know what your utilization ratio is. (Just a reminder for folks who don't remember what this is — the credit utilization ratio is the amount of credit you've used compared to the amount of credit you have available.) You have excellent credit, and you take pride in that.
You always pay your balance in full — and on time — every month. You feel confident about your financial future even if the economy doesn't look great. You have an emergency fund set aside for unexpected expenses, so that makes you feel like you can weather any financial setbacks.
You might be extra cautious because you got burned during the recession. As a result, you've vowed to never get caught in a credit card mess again. So over the past few years, you've made an effort to learn everything you can about personal finance and managing credit.
These days, you feel pretty confident about your finances. You use your credit cards regularly, but you're careful to stay under budget. Your motto is "Don't spend more than you absolutely have to."
I always advise people to pay their balances off every month. But I do know there are some folks who use their cards to make ends meet. If you're a smart revolver, you've figured out how to carry a balance and minimize your interest expense.
You're also keenly aware that your FICO score is affected by your utilization ratio. You try to pay more than the minimum payment, and you always pay the bill on time. You're doing the best you can to maintain a good (or even excellent) credit score.
If this is you, you have no idea what a utilization ratio is. In fact, since you didn't even read the disclosure statements, you don't know off the top of your head what your interest rate is. This group is likely to get into serious debt before they know what hit them.
Just for the record, there's no shame in this category. Unless you had a parent who taught you about credit before you graduated from high school — or at the very least, college — you had to learn the hard way. No one is born with a working knowledge of compound interest.
So what's your credit card spending style? Listen, there are no wrong answers here. I'll 'fess up and admit that I was once a Rookie Revolver. Hey, I'll bet most of were at some point in time.
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