Psychotherapists agree that our parents have a profound impact on the people we become. By and large, your parents probably set a wonderful example for you to follow.
But what if your parents had some less-than-ideal financial behaviors? Specifically, how should you go about unlearning your parents' bad credit card habits? The key is to recognize where Mom and Dad went wrong and make a plan to do better on your own. Ready to get started? Take a look at the following details.
If your parents paid only minimums
Why it's a problem: Your credit card company requires you to pay only a small sum every month to keep your account in good standing. But minimum payments usually represent only 1% to 3% of your total balance. If your parents paid only minimums each month, they were digging themselves deeply into debt.
This is problematic for two reasons. For one thing, credit card debt carries a high interest rate. This month, the average credit card interest rate hovers around 15%. If you're not paying off your balance in full every month, you'll end up paying way more for your purchases in the long run.
Also, carrying credit card debt is bad for your credit score. Thirty percent of your score comes from your credit utilization ratio; if your parents consistently used more than 30% of their available credit because they made only minimums, it's likely their scores weren't in tip-top shape. This probably made it difficult and expensive to obtain other loans.
How to do better: Make it a priority to pay your credit card bill in full each month. If this is tough for you, these tips should help:
- Make a budget. This will help you plan for your credit card spending
- Track your spending. After making a budget, you should keep tabs on how you're doing. Use your bank's online tools to help.
- Set alerts. Most credit card issuers allow you to set text or email alerts when your spending has hit a certain threshold. This will help keep you accountable.
If your parents paid their credit card bills late
Why it's a problem: Paying credit card bills late is one of the worst things you can do for your credit score. Thirty-five percent of your score comes from your history with paying your bills on time. If your parents made a habit of paying their credit card bills late, their credit probably suffered.
Plus, paying your credit card bill late by even a day can result in a fee. Most issuers charge $25 for the first offense and $35 for subsequent late payments. This might not seem like much, but it can really add up over time.
How to do better: If you're properly budgeting and tracking your spending, you should be ready to pay your bill as soon as it comes in, so don't delay.
Once again, setting up alerts with your credit card issuer is helpful. Arrange to get a text message or email when your bill is issued, and another in advance of your due date. If you prefer the old-fashioned route, mark your calendar. Find a method that works for you, and stick to it!
If your parents were constantly shuffling credit card debt around
Why it's a problem: Doing a balance transfer to pay off high-interest credit card debt is a good idea if you do it carefully. But if your parents were constantly charging up their plastic and then shifting the balance onto 0% cards, they weren't showing ideal credit card behavior.
First, balance transfers come at a cost. Most issuers charge a fee of 3% of the total amount you're transferring to move the debt. Depending on the size of your balance, this could amount to big bucks.
But more importantly, constantly shuffling debts around is a sign that your parents weren't managing their money well. Everyone overcharges sometimes, but if you're spending and budgeting carefully, this should be rare.
How to do better: If you make a mistake and end up in credit card debt, finding a good balance transfer deal can help you minimize interest charges.
But be sure to take a step back and figure out why you were forced to take this route. Maybe you need to build an emergency fund to help deal with unexpected expenses, or maybe your budget needs tweaking. Either way, take a balance transfer as a sign that you need to work on your financial habits -- and then be sure to do so.
The bottom line: Our parents worked hard to teach us good habits, but they may not have been perfect. If you need to unlearn some bad credit card behaviors, check back often with the Nerds -- we're here to help!
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