Your Complete Guide to Credit Card Health

Author Nickels
Read time 6 minutes read time

Credit card health may not be something you think about every day. Yet, credit cards are one of the most commonly used financial products in America. More than 175M Americans have at least one card and Americans there are over 500M credit cards in the US with more than $930B in debt on them today.  

Credit cards can be great. They provide the opportunity to purchase items without always having to carry cash, offer protections from fraud and merchant disputes, and can provide nice rewards. Credit Cards have also been called the plastic safety net because they allow for purchases even if the cardholder doesn’t have the money on the day of the purchase. With great financial flexibility also comes potential pitfalls if not used properly.  

Credit card debt is one the most expensive forms of consumer debt in America. With cardholders charged more than $115B in interest and fees per year on their credit cards. That is  over $100B each year that cardholders are paying to the major card providers instead of purchasing necessary items, paying off other debt, or saving.

In a survey by ThrivingWallet 90% of Americans say money impacts their stress level and 40% say managing their money on a daily basis limits the extent to which they can enjoy daily life. Credit cards and credit card health play a big role in that overall financial health picture. Credit card health can also significantly impact other areas of your financial health including your credit score and your savings.  

Once you understand what credit card health is and why it is important then you can take a proactive role to improve and maintain good credit card health. 

What is Credit Card Health?

Credit Card Health is the ability to use credit cards in a way that minimizes card fees, expands financial flexibility, and improves credit scores. 

You can use your credit cards to expand your financial capabilities and options. Unfortunately, today’s credit card ecosystem is designed to optimize interest and fees, not health. This is because the major card providers have very little interaction with customers outside of their card relationship, so they are incentivized to maximize their revenue via high interest fees. The 2021 FinHealth Spend Report found that the average “Financially Vulnerable household spends 13% of their annual household income on fees and interest. This is before addressing housing, insurance, and basic needs.” If you are not paying attention to your credit card health you will undoubtedly accrue interest charges and fees that lead to additional debt, hurt your credit score, and limit your financial flexibility. 

Credit Card Health impacts 3 of the 5
elements of Financial Health

Why is Credit Card Health Important?

Credit card health can be a key influencer of your overall financial health portfolio. Your financial health is made up of your net worth, debt-to-income ratio, savings-to-income ratio, spending trends, and credit score. Falling asleep on any one of these elements will negatively affect one to three other areas. Your credit score, spending trends, and debt-to-income ratio are all directly linked to credit card health.

How to Achieve and Maintain Good Credit Card Health

1. Control Your Spend

Keep your credit utilization in check. Credit utilization is the ratio of consumer spending over their spending limit. Generally it’s best to keep your credit utilization below 30%, below 10% is even better. Anything above 30% will increasingly hurt your credit score.

Track your spending and set a limit. It’s good to understand how much you currently spend and set a limit accordingly. Creating a budget is critical to this process, but you can also monitor spending by setting up alerts for when you are close to reaching your spending limit. Or you can create scenarios where it’s hard for you to use your credit cards. For example, you can remove your credit card from online accounts (e.g. Google Pay, Apple Pay, etc.) or temporarily lock your cards through your mobile banking app.

2. Manage Your Payments and Debt

Paying in full is the way to go. Paying the full statement amount is crucial to making your cards work for you, instead of against you. Yet, many Americans look to their minimum monthly payment and in many cases, despite being able to pay more, will choose the path of least resistance. 

Beware of the “anchoring effect”. This is where credit card companies offer cardholders an option to pay the minimum amount to entice consumers to pay less than they can and remove the likelihood of full payments. This hurts you and helps them!

Don’t let debt snowball. Consumers with low credit scores are the most likely to have revolving debt carrying balances over to the next billing cycle. Carrying balances from one bill cycle to the next not only affects your credit utilization (see Control Your Spend above), but it also will cost you in the form of interest. 

Pro tips:

3. Dates Matter When it Comes to Credit Score

Know your statement’s closing date. This date is important because it is the date your balance is reported to the credit bureaus. Why does this matter? This impacts your credit utilization ratio which is one of the most significant factors impacting your credit score

Paying off your balance, or paying down your balance before your statement’s closing date is critical to keeping your credit utilization low. If you find yourself in a crisis, don’t ignore your bill. Call your credit card company and inform them of your situation. Most companies will work with you and make alternative payment arrangements.

To recap, credit card health is an essential piece of your overall financial health portfolio. If you are able to keep your spend in check, know the dates that matter, and keep snowballing debt at bay, you can reap the benefits of good credit card health.