For at least the next decade, Americans will be married to debt, and divorcing it may not be an option for many. That's because the 10-year trends show our expenses have grown faster than our incomes. If we as a nation don't develop better budgeting habits, the gap between expenses and income may show itself in growing debt balances over the next decade.
In the video segment below, the Motley Fool's Michael Douglass and Nathan Hamilton discuss two crucial facts that may lead you to change how you use credit cards. If you're trying to pay down credit card debt faster, spend wiser, or secure a credit card sign-up bonus, you'll want to listen in.
Michael Douglass: So thinking about credit cards, it's pretty clear that a lot of people need to change how they use credit cards...
Nathan Hamilton: Sure.
Douglass: ...and we've compiled, here, a few statistics that I think really highlight why people need to think pretty hard about how they're using their credit cards and how to better use them and stay out of paying that really high-interest debt.
So let's start with this. Cash-back cards have an average APR of 20.9%...
Hamilton: So high...
Douglass: ...which is just ridiculous.
Hamilton: Absurdly high.
Douglass: Yeah. I mean, you know, it pays what, 5% or 6% on a car, maybe?
Douglass: A mortgage might be 3.5% to 4%?
Douglass: 20.9%,I mean, that is an exceedingly big number. I mean, if you pay $10,000 off over three years at that APR, you're paying about $3,500 in interest over that time. And that's just money that you're flushing down the toilet.
Hamilton: It's building somebody else's wealth, not yours.
Douglass: Right. Which is just a huge problem for you, so hopefully this will help you change how you think about racking up debt on a cash-back card. And let's also talk about how much Americans pay annually in credit card interest. It's $93 billion.
Douglass: Billion with a "b."
Hamilton: Yeah, and that's the estimated amount if you look at the total credit card debt that the Fed reports, and so forth, and the current interest rates on credit cards. But really what it puts into context is some amount of that debt people are paying their balances monthly to avoid interest charges...
Hamilton: ...which you mentioned at the beginning -- people who are and aren't using credit cards appropriately.
Hamilton: And one appropriate way is to use rewards to earn rewards and pay off your balances monthly. You might as well take advantage of the 2% cash back, say, that you can get. But for the other overwhelming majority of people that are carrying debt, it doesn't necessarily make sense to be continually spending on credit to move all your budget to credit cards, because you need to ensure there's cash in the bank, too, to cover your purchases.
Hamilton: And credit cards aren't a good way. I mean, let's admit that they're very convenient to use...
Hamilton: ...but it's not a good way to essentially meet your budgeting goals. So if you are, indeed, paying your balances off monthly, boom. That's something worthwhile to use with the credit cards, but if not, definitely consider some other options, be it a debit card or even that cash stuff which I think exists nowadays.
Douglass: Yes, absolutely. And fortunately, if you're ready to take the next steps on this journey, we've got a lot of good information at fool.com/credit-cards. For example, we've got a free copy of the 3-Step Guide to Singling Out Your Ideal Credit Card. And then we also have our picks for the best credit cards of 2017, which no matter where you are on this journey, [it] should be a resource that's helpful. To help [get you] thinking about how you want to use debt to build your wealth instead of somebody else's.
Hamilton: Yes. I mean there's cards in there for good credit. Excellent credit. There's cash-back cards or sign-up bonus cards. There's balance transfer cards. Low APR cards. It really touches upon all the different options out there, so it is a useful guide, regardless of whether you're part of these statistics we just talked about -- paying interest -- or not.
Douglass: Yes, absolutely. So again, be sure to check us out at fool.com/credit-cards. Nathan, thanks much.
Hamilton: Thank you.