Everyone uses credit cards maybe a little too much. In the United States, the collective credit card debt total in 2015 reached $60 billion. The average household credit card balance is at almost $7,200. Some of this debt is necessary. Some Americans charge medical and emergency expenses to credit cards. However, a lot of this debt is just frivolous and unnecessary spending. But there's one surefire way to control your credit card debt.
Just treat your credit cards like another debit card. Don't charge more to it than what's in your checking account. This method works for a couple reasons. First, you'll never charge more to your card than you can afford to pay back. Second, you'll never have to pay interest on outstanding balances.
When you use a credit card, you are essentially borrowing money from whatever bank backs your card. You have paid for the item, but you still have to pay back the money you borrowed. Most loans have a minimum balance set that you have to pay on time every month to avoid a default. Credit cards have this too, but they are usually very low. Most cards require a minimum payment of at least $25 a month. This is one of the biggest culprits of spiraling credit card debt. Why pay more than $25 if you can avoid it?
Also, just paying the minimum required leads to carrying a balance on the card. This outstanding balance still counts toward your credit limit. You shouldn't be charging too much to your card anyway, but the outstanding balance will further limit the amount you can charge. Not to mention charging more than about 30 percent of your credit limit will reflect poorly on your credit score. It's best to keep this as low as possible anyway.
Let's not forget about interest. Carrying a balance from month to month causes interest charges to be added to your account. Depending on your credit score, most cards charge between 13 and 20 percent interest. This really adds up quickly when you have a bigger balance. Fifteen percent interest on a balance of $100 is just an extra $15. But 15 percent interest on $400 is another $60. And you can be charged interest on the new increased balance the next month if you don't pay it off in time. If you keep this going for awhile, you could easily rack up a huge, overbearing balance. It's just not worth it to carry a balance month to month on a credit card.
But still, the most effective way to avoid stacking up a lot of debt is to just not use credit cards at all. Or very sparingly. If you don't think you can control your spending, it's best to just not use credit cards at all.
When you take out a loan for a car, charge something to your credit card, or get a personal line of credit, there is going to be an interest rate that applies to your loan.
A lot of different factors go into what you will be charged, including your own personal credit score. But even those with flawless credit still see a minimum charge that they can't get around. That all goes back to the Federal Funds Rate.
One thing consumers rarely realize is that all of our banks are lending money to each other every night. Banks are legally required to maintain a certain percentage of their deposits in non-interest-bearing accounts at the Federal Reserve to ensure they have enough money to cover any withdrawals that may unexpectedly come up. However, deposits can fluctuate and it's very common for some banks to exceed the requirement on certain days while some fall short. In cases like this, banks actually lend each other money to ensure they meet the minimum balance. It's a bit hard to imagine these multibillion-dollar financial institutions needing to borrow money to tide them over for a bit, but it happens every single night at the Federal Reserve. It's also a nice deal for those with balances above the reserve balance requirement to earn a bit of money with cash that would normally just be sitting there.
The Federal Reserve
The exact interest rate the banks will charge each other is a matter of negotiation between them, but the Federal Open Market Committee (FOMC) (the arm of the Federal Reserve that sets monetary policy) meets eight times a year to set a target rate. They evaluate a multitude of economic indicators including unemployment, inflation, and consumer confidence to decide the best rate to keep the country in business. The weighted average of all interest rates across these interbank loans is the effective federal funds rate.
This rate has a huge impact on the economy overall as well as your personal finances. The federal funds rate is essentially the cheapest money available to a bank and that feeds into all of the other loans they make. Banks will add a slight upcharge to the rate set by the Fed to determine what is the lowest interest that they will announce for their most creditworthy customers, also known as the prime rate. If you have a variable interest rate loan (very common with credit cards and some student loans), it's likely that the interest rate you pay is a set percentage on top of that prime rate that your lender is paying. That's why in times of low interest rates (it was set at 0% during the Great Recession), a lot of borrowers should go for fixed interest rate loans that won't increase. However, if the federal funds rate was relatively high (it went up to 20% in the early 1980's), a variable interest rate loan may be a better decision as you would be charged less interest should the rate drop without the need to refinance.
The federal funds rate also has a major impact on your investment portfolio. The stock market reacts very strongly to any changes in interest rates from the Federal Reserve, as a lower rate makes it cheaper for companies to borrow and reinvest while a higher rate may restrict capital and slow short-term growth. If you have a significant portion of your investments in equities, a small change in the federal funds rate can have a large impact on your net worth.
Whether you're leaving a job involuntarily, departing for something new, or just want to prepare for the unknown, it is smart to understand all your options regarding your 401k.
Frugal gifting often gets a bad reputation. However, this shopping method does not make you cheap — it makes you practical. Frugal gifts often avoid waste and overspending and can be just as meaningful (if not more so) as any other present.
With the National Retail Federation predicting each consumer this holiday season to spend upwards of $1,000 on holiday gifts amidst an economic recession —this year might be the perfect time to reconsider your spending budget. We've formulated the ultimate list of frugal gift-giving ideas to get you started.