Published in: Research | Aug. 29, 2019
By: Christy Bieber
When it comes to managing your money, there’s a lot to do -- and a lot to know.
Unfortunately, most Americans fall short when it comes to key areas of financial knowledge. Their money habits aren't much better. In fact, just 2 in 5 U.S. adults have a budget and keep careful track of spending, while 30% admitted to having no non-retirement savings whatsoever.
Confusion about your finances and a lack of financial planning can cost you. To learn more about what Americans do and don’t know, The Ascent surveyed more than 500 U.S. adults about their credit card knowledge. While the survey revealed the average American does know some of the basics -- such as their credit card’s annual APR and how to avoid credit card interest -- it also showed some important knowledge gaps.
How do you fare compared to your fellow Americans? See if you know the answers to these three financial questions that most people got wrong.
According to The Ascent’s survey, 70% of American credit card holders didn't know they have the legal right to request one late payment fee waiver from their credit card issuer each year.
By law, credit card companies can charge you $25 for your first late payment and $35 for additional late payments within six months of the first. It’s unfortunate so many Americans are unaware they can avoid this fee, as late payments have become increasingly common.
In fact, Experian’s 2019 State of Credit report showed a 28% rise in payments 30 or more days past due between 2016 and 2019 -- and a 34% increase in payments 90 or more days past due.
When you’re already struggling to pay your bills on time, an extra $25 or $35 charge doesn’t help. Late payments also have other far-reaching consequences, including serious damage to your credit score.
Always reach out to creditors to request your annual fee waiver if you're charged for a late payment. If you’re at risk of falling way behind or making multiple late payments, consider asking if you can work out a payment plan that might mitigate damage to your credit.
Keeping the theme of credit, The Ascent also asked whether it was true that applying for too many credit cards permanently impairs your credit score.
Half of all survey respondents said yes, although responses varied by income level.
But this is false -- a large number of applications doesn't have a permanent effect on your score.
Applying for too many cards can have a short-term negative impact, as each application results in an inquiry on your credit report. Inquiries account for 10% of your score and having too many of them lowers your rating.
Opening too many credit cards at once also shortens your average age of credit. The length of credit history accounts for 15% of your score and a shorter history results in a lower score than a longer one.
However, inquiries remain on your report for just two years. Once dropped from your report, they no longer have an adverse impact. Newly opened cards also become older cards over time. And having multiple cards open helps you develop a positive payment history on each one. That's a major benefit, as payment history accounts for 35% of your FICO® Score.
Having multiple open cards can also result in ample available credit, which can be a credit score booster as long as no cards are maxed out. Credit utilization ratio, the ratio of your debt to your unused credit, accounts for 30% of your FICO® Score. Large lines of credit with low utilization ratios lead to higher credit scores.
Balance transfer cards are a particular type of credit card -- and one that causes ample confusion. Approximately half of all survey respondents know little or nothing about balance transfer cards. But, again, there were significant disparities among demographic groups.
Survey respondents ages 18–29 were least likely to know about balance transfers, with just 38% reporting they feel knowledgeable about their benefits. Close to 58% of adults ages 30–34 and 56% of respondents between 45 and 60 felt knowledgeable.
Household income was a factor here, too. More than 55% of people with incomes between $50,000 and $124,999 reported knowing the benefits of balance transfers -- compared to 35% of respondents with incomes between $10,000 and $24,000. Those in both higher and lower income groups also expressed a lack of knowledge about balance transfer benefits, with around 45% of people earning less than $9,999 or between $125,000 and $174,999 indicating an awareness of these advantages.
Finally, credit score made an impact as well -- about a third of people with credit scores of 600 or below said they were confident in their knowledge of balance transfer benefits compared with 50% or more people with credit scores above 600.
A lack of awareness can be costly because balance transfers are an invaluable tool to make debt payoff easier. "It may seem counterintuitive, but the fastest way for many people to pay off credit card debt is to sign up for a different credit card," advised Nathan Hamilton, director of The Ascent by The Motley Fool. "Balance transfer credit cards include lucrative 0% intro APR offers that can help you pay off debt faster."
Up to 15 months of 0% interest could help many Americans; more than 6 in 10 indicated they did nothing in the past year to lower their interest rates. And as credit card debt rises -- it hit $848 billion in Q1 2019 -- balance transfers could save borrowers a huge amount of money.
"Taking time to learn more about these simple strategies is a smart first step to take when figuring out how to tackle your debt," Hamilton advised.
Were you among the Americans who answered these questions correctly -- or did you have some wrong answers?
Having gaps in your financial knowledge could cost you. The good news is there are plenty of resources that can help. The Ascent, for example, is a great place to learn more about credit cards, financial planning, and your rights as a consumer.
Take the time to understand the basics of financial products. Your financial situation will be better for it.
The findings in this article are based on The Ascent's recent credit card survey, which asked over 500 U.S. adults about their credit card knowledge and habits.
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