by The Ascent Staff | Updated July 21, 2021 - First published on Nov. 5, 2019
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...with enough left over to throw in Berkshire Hathaway.
Americans submitted about half a million credit card applications per day last year, according to the Consumer Financial Protection Bureau. That's the same number of people watching Instagram stories on a daily basis.
Credit may be a little harder to get than it was a few years ago, but once credit card issuers have you in their sights, they make it easy for you to accept their offers. All you need is your mobile device, some personal information, and a few seconds to wait for an approval.
In total, consumer credit lines in the U.S. exceeded $4 trillion last year. This means that the collective credit of the American public could buy up all of the outstanding shares of Apple, Amazon, Microsoft, Facebook, and Berkshire Hathaway at their recent share prices.
Americans have enough credit at their disposal to rack up enormous debts and bring the economy to its knees. However, there's no need to panic just yet. There are signs that many Americans are using their available credit wisely, and having a high credit limit can be great for an individual cardholder.
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Of the 65 million general-purpose credit card applications submitted in 2018, about 70% of the approvals went to individuals with prime and superprime credit scores. Superprime borrowers have a record of using credit responsibly and are viewed by lenders as posing minimal default risk. People in this group tend to qualify for lower interest rates and credit cards with better rewards.
Superprime borrowers may be behind the general increase in available credit, but they're not using that extra credit recklessly. Last year the average superprime credit cardholder had used less than 15% of about $32,000 in available credit. So long as you're using less than 30% of the credit available to you, you can achieve an excellent credit score, and lenders won't see you as a lending risk.
In other words, it appears superprime borrowers are being responsible with their high credit limits. At the same time, though, credit limits have grown the fastest among borrowers with the lowest credit scores. Since these subprime borrowers appear to be using more of their credit, it’s important that they recognize the difference between good and bad uses of debt.
For those who may not have a $32,000 credit line, learning to distinguish good debt from bad debt could be a big step toward becoming a superprime borrower.
The upside to debt is that it allows us to obtain things that would otherwise be out of our reach, and "good debt" can actually improve your financial situation. For example, mortgages enable you to purchase a home that may gain value over time. Not only do these kinds of loans have relatively low interest rates, but they have the potential to pay off down the road.
Credit card debt is often used as a safety net, which is fine if the debt is promptly repaid. Using a credit line in place of savings may free up more of your cash for current use, but it tends to be more costly in the long run. An outstanding credit card balance racks up interest that you wouldn't pay if you used emergency funds from a bank account.
Besides being a potential (but not ideal) source of emergency funding, a credit card is a more secure way of making purchases. Fraudulent charges can be disputed, and purchase protection helps consumers avoid losing money to vendors who don't deliver as promised. When charges are made to your credit card, you have a period of time to sort out any errors before your payments are due. In contrast, when you use a debit card, your funds are immediately tapped, and you'll have to resolve any issues before you have a chance of getting your money back.
There are many other benefits to using your credit card, but you shouldn't get a card unless you're prepared for the responsibility. It pays to get a credit card that rewards you with frequent flyer miles, cash back, or other perks, but the bonuses shouldn’t drive your spending decisions.
The combined borrowing capacity of American consumers translates to enough buying power to purchase America's biggest companies. With that kind of financial leverage, we all need to wield our bank-issued plastic responsibly -- for our own sake and for the economy's, too.
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