May 23, 2005
Fact or Fiction: Californians and Their Credit Cards
Households Average $8,000 in Credit Card Debt
REDWOOD CITY, Calif. — Although the average American household has about $8,000 in credit card debt, most Californians believe they use credit cards responsibly.
According to a survey by the California Society of CPAs (CalCPA), most Californians claim to either pay off their entire balance or more than the minimum each month.
What’s more, a significant majority — 68 percent — said they had less than a $1,000 balance on their credit cards each month. But Federal Reserve statistics indicate that the credit card debt for the average American household is about $8,000.
The findings were part of a financial literacy survey of 800 California residents CalCPA sponsored to determine how well Californians manage their money.
“I can’t believe that Californians are so careful with using credit cards that they are carrying much less credit card debt than other Americans,” says Michael Eisenberg, CPA/PFS. “Perhaps because of the booming housing market in California, many homeowners are refinancing their mortgages or taking out a second at variable rates and then paying off their credit cards.”
Eisenberg notes that homeowners can deduct the interest on first and second mortgages on their income taxes. But if those loans were made with variable interest rates that start fairly low, homeowners may have difficulty making payments should those variable rates become fixed at higher interest in five years or so.
Regardless, Eisenberg believes that most people carry more plastic than they should. “I’ve got clients with wallets bulging with cards from department stores and oil companies, in addition to several Visa or MasterCard accounts. How can they keep track of all their spending! If they seriously want to control their debt, I tell them to rip up most of their cards and use only one or two for necessities.”
Here are some other tips that Eisenberg and other CPAs provide their clients on how to use credit wisely.
Be Aware of Teaser Rates
Credit card companies sometimes offer low introductory interest rates to attract new customers. These rates typically last for only a few months and then jump as high as 20 percent, so it’s important that you carefully compare offers from several different issuers before selecting a card.
Pay in Full Every Month
Get in the habit of paying the balance in full each month, which means don’t charge more than you can pay off at the end of the month.
Pay on Time
Send the credit card payment several days in advance of the due date to allow for mailing time. Even better, use your bank’s online bill paying service to schedule payments on a regular basis. Late penalties are costly, and some companies will increase the interest rate after one or two overdue payments.
Avoid Cash Advances
Be aware that the interest rate on cash advances can be much higher than the rates charged on purchases.
Protect Your Credit History
As soon as you start using a credit card, the payments — whether paid on time, late or not at all — become part of your credit history. A poor credit history can affect your ability to rent an apartment, get a job or buy a car or house. What’s more, the mark stays on your credit record even if the bill is later paid.
Don’t Exceed the Credit Limit
This helps avoid penalties and ensures that you will have credit available in the event of a true emergency. A $2,000 credit limit doesn’t mean you can afford to carry a $2,000 balance.
Review Statements Carefully
Immediately inform the credit card company of any discrepancies or errors on your monthly statement.
Turn Down Card Offers
Just because it’s easy to apply for multiple cards doesn’t mean you should. This is especially tempting when department stores offer you discounts on purchases if you apply for a credit card. It’s easier to manage one credit card and pay off only one bill at the end of the month. Besides, just applying for multiple credit cards can hurt your credit rating. Also, using one credit card to pay off another is a dangerous practice that should be avoided.
Report a Lost or Stolen Credit Card Immediately
Keep a copy of your credit card account number and the financial institution’s name and customer service telephone number in a convenient place in case your card is lost or stolen.
Protect Personal Information
Never provide your credit card number unless making a telephone, mail order or online purchase. Also, don’t let anyone else use your credit card and don’t charge purchases for other people.
Learning how to use credit wisely now will help you avoid serious credit problems later.
More Survey Results
The survey found that 45 percent of California residents polled say they usually pay off the balance on their credit cards each month while 26 percent pay more than the minimum each month. Twenty-four percent indicated they did not use credit cards at all. Only 2 percent responded that they just pay the minimum each month. The remainder said they didn’t know or declined to answer.
Regarding their total credit card debt, 68 percent said it was less than $1,000, and 8 percent said it was between $1,000 and $2,500. Nine percent believe their credit card debt is between $2,501 and $5,000; 5 percent said between $5,001 and $10,000. Three percent said their debt was over $10,000. The remainder declined to answer or didn’t know what their credit card debt was.
Asked “which of the following statements best describes your feelings about your current financial situation,” 35 percent said they were comfortable with their current income and had adequate savings and investments. An additional 31 percent said they also were comfortable with their current income, but they needed to save and invest more.
Twenty-three percent were uncomfortable with their current income and had little saved or invested. Another 9 percent indicated they had adequate savings and investments but were uncomfortable with their current income. The remainder didn’t know or declined to answer.
The Industrial Mutual Association of Burton, Mich., conducted the survey of 800 California residents on behalf of CalCPA from March 23 to April 1. The survey has a potential margin of error of about 3.5 percent (+/-) at a 95 percent confidence level
About CalCPA
The California Society of Certified Public Accountants (CalCPA) (www.calcpa.org) is one of the nation’s largest accounting organizations and the largest CPA association in California. It serves 27,000 members in public practice, private industry, education and government. In 2003, CalCPA launched a major financial literacy initiative, including creating CalCPA Institute, a 501(c)(3), the primary goal of which is to improve the financial literacy of all Californians.
