The internet has been buzzing about financial disclosures from recently confirmed Department of Health and Human Services Secretary Robert F. Kennedy Jr. Kennedy indicated he owes American Express between $610,000 and $1.2 million.
[Read: Best Credit Cards with High Credit Limits.]
This has led people to wonder why someone so wealthy would run up so much credit card debt. Though it may be fun to speculate, the news can serve as a reminder for people to examine their own credit card habits.
Wealthy Consumers and Credit Card Debt
Kennedy’s credit card balances of up to $1.2 million may not be as bad as it seems.
High earners generally have larger credit card balances than other Americans, according to Federal Reserve data. For one thing, high earners can qualify for larger credit limits. For another, wealthy people may have the ability to spend more and thus rack up higher credit card balances.
There’s no way of telling from the disclosures whether Kennedy is carrying those balances from month to month. If he’s clearing his balances every month, he gets to use that cash flow without paying interest. That can be a smart tactic.
Kennedy’s disclosures are only a head-scratcher if he regularly carries balances on that scale. After all, the disclosures show Kennedy’s credit card interest rates are a little over 23%. If it took him two years to pay off $1 million in credit card debt, he’d pay about $257,000 in interest.
[READ: Debunking 7 Common Credit Card Myths ]
When Big Balances Make Sense
Running up a big credit card balance isn’t a problem if you’re on budget and can pay it off at the end of each billing cycle. In that case, you get the convenience of using your card as a cash substitute without any interest charges. And you can really pile up the rewards points.
Big balances can become a problem if you can’t pay them off each month. Not only would you incur interest charges, but it’s often a sign that you can’t make ends meet without continuous borrowing.
How Are You Managing Your Own Balances?
Everyone should pay attention to their spending habits, and your credit card bills can tell you how well you’re managing.
— If you can pay off your balance in full, you’re probably in excellent shape.
— If you’re carrying a balance but can pay more than the prior month’s new charges, you’re on the right track.
— If you can pay more than the minimum required amount, your problems may not yet be critical. But you should hear alarm bells if your balances are growing.
— If you can only pay the minimum amount, you’re probably headed for trouble.
— If you can’t pay the minimum amount, get help immediately.
In addition to your payments, look into how much of your available credit you’re using. Increasing balances or maxed-out credit cards indicate unsustainable spending patterns. And they’re a red flag to credit-reporting companies and lenders.
“If you’re using credit cards to pay for everyday household needs, you’re probably relying more on credit than you should,” says Martin Lynch, president of the Financial Counseling Association of America.
Lynch suggests making sure your spending is sustainable without relying on credit. “An accurate, working budget is the critical tool that everyone needs. Plan your spending in advance, and target the purchases you want to make with your credit cards. If you’re not planning to use them on a given day, leave them home,” Lynch says.
[READ: 5 Best Ways to Consolidate Credit Card Debt]
Benefits of Paying Credit Card Balances Down
Here are some reasons it makes sense to pay off your credit card balances every month:
— Avoid interest charges. For purchases, you typically have until the end of the billing cycle plus a grace period before you’re charged interest.
— Keep your credit limit available for emergencies. If your balances start creeping higher over time, you won’t have much room left in your credit limit when you really need it.
— Maintain a healthy credit score. Carrying high balances can drag your credit score down.
— Make sure your budget is sustainable. Any money you can’t pay off now will just subtract from what you have available to spend in the future.
[Read: Best Credit Cards.]
How to Pay Off Credit Card Debt Faster
If you’ve been carrying credit card debt for a while, here are some ways you can pay it down:
— If you can’t pay off the full balance, at least try to pay more than the minimum every month.
— If you have multiple credit card balances, work toward clearing the one with the highest interest rate first.
— Create a budget you can afford on your income. Your budget should include extra payments to eliminate your credit card debt.
— Give your credit cards the day/week/month off.
— Build an emergency fund, so an unexpected financial setback won’t force you to resort to credit card borrowing.
Remember, the Kennedys are a famously wealthy family. If your finances are closer to average, examine your credit card use and rein it in if necessary. That will help you build your own wealth in the long run.
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RFK Jr. Reports $1.2M Credit Card Balance. How Much Credit Card Debt Is OK? originally appeared on usnews.com
