Fueled by a burgeoning economy, shoppers have slowly but surely rekindled their love affair with plastic. A new MasterCard analysis shows that in 2012, U.S. credit card volume grew by $172 billion year-over-year, an increase of 8.4%.
We’ve pretty much done a complete 180 since the onset of the recession. Back in 2008, Americans shifted more than $140 billion from credit to debt card spending.
You could say consumers are simply feeling more secure about their ability to handle credit card bills these days. But looking closer at the study, we found two dangerous signs that we could be getting in over our heads again.
More than half of credit users say they continuously carry a balance on their accounts and 54% of consumers say they use credit for rewards, up a full 9 points from 2008.
Credit lenders are incentivizing overspending and consumers are clearly taking the bait.
Already, we can see the effect rewards are having on credit use. The average credit card transaction is only $93, signaling that consumers are leaning on credit even for everyday purchases in order to get rewards.
Credit perks are all well and good if you’re planning on paying your card down each month. But what’s the point in cashing in credit rewards if you’re dragging your credit score down and running the risk of paying late payment fees in the process?
There’s real danger in relying on credit cards just for a few extra cashback points. First of all, carrying balance on your credit card is one of the easiest ways to lower your credit score. You’re basically telling lenders that you’re willing to rack up charges without having the means to pay them off in quick fashion.
“The amount of debt a consumer carries tends to be highly predictive of future credit performance because the amount a person owes has a direct impact on her or his ability to pay all their credit obligations on time each month,” says Barry Paperno, consumer operations manager for myFICO.com. “While having debt doesn’t automatically put someone in a high-risk category, as balances increase, the probability of having difficulty making payments on time each month increases.”
In an ideal world, everyone would pay down their credit card balance in full each month. Realistically speaking, most experts recommend keeping your total debt load at one-third of your available credit limit.
We’d recommend going even further. A recent FICO report found that people with the highest credit scores typically carried debt loads less than 7% of their total limits.
A good rule of thumb: If you’re about to use a credit card, just ask yourself if you’d be making that purchase if you were using cash instead. If the answer is no, chances are you’re better off keeping that card parked in your wallet.