The Importance of Financial Literacy

April 24, 2012, Written By Lynn Oldshue

The less you know about credit cards, the more you will pay, especially if you are a woman.

A study from the FINRA Investor Education Foundation showed that women with low levels of financial literacy were more likely to take part in costly credit card behaviors than men with a low level of financial literacy. However, there were no differences in behavior between men and women with high financial literacy.

The findings imply that increasing financial literacy can improve credit card management as well as reduce or possibly eliminate gender-based differences in credit card behavior.

According to the survey, women were six percentage points more likely than a man to be charged a late fee, five percentage points more likely to carry a balance, and four points more likely to pay the minimum payment on their cards.

Women were also less likely to pay their balance in full and comparison shop for credit cards.

But many of these gender differences were minimized or eliminated by increasing the level of financial literacy.

One exception to this is in the area of interest rates. Both men and women with low levels of financial literacy pay more in credit card interest rates than those with high financial literacy. But females pay half a percentage point more in credit card interest rates than men, regardless of financial literacy level. This could amount to thousands of dollars over a lifetime.

Financial education should start at home and at an early age. Parents should teach their children how to budget, spend wisely, and properly use credit. These are some of the most valuable lessons we can teach our children. This is not an education they should learn by making their own mistakes.

Here are some credit card tips for women:

If you can’t afford to pay for it with cash, you can’t afford to pay for it with a credit card. A credit card is a high interest loan. Unless you pay off your balance each month, you will be charged interest on every single purchase you make. If you do carry a balance, stop using your card except for emergencies.

* Don’t apply for a card on impulse. The offer you receive in the mail may not be the lowest rate you can get. Shopping for the lowest rates can save you hundreds of dollars in interest payments each year. Credit card comparison sites offer easy ways to compare all card offers.

* Avoid store cards. The discounts may be tempting, but stores offer credit cards because they make money, not to save you money. Many retail stores offer credit cards with interest rates between 23% and 30%, much higher than bank-branded credit cards. Many stores train their employees how to push credit cards to customers and to overcome your objections.

* Pay on time, every time. A due date can pass by so quickly and quietly, but the consequences are harsh. The late fee is typically up to $35 and the interest rate can increase up to the penalty rate that can be as high as 30%. It can even pull down your credit score and push up other interest rates. Set a text or email payment reminder so the date doesn’t pass you by.

* Pay more than the minimum payment. Issuers benefit when you pay the minimum monthly payment because it will take you longer to pay off the balance, and hence, cost you more in interest penalties. Pay as much of the balance as you can each month until you have the balance completely paid off.

The minimum payment is just a trap that squeezes out many years of interest payments without significantly paying down the balance. Look over your next credit card bill to find how long it will take to pay off your balance if you make only the minimum payment. You will be shocked to see how much you will pay in interest.

* Pay often. You can make extra credit card payments any time, not just on your due date. Use birthday money, tax returns, consignment sales, second jobs, wherever you can find extra cash. Paying down this debt will bring better returns than most investments.

* Know your credit limit and stay under it. Your credit limit is available credit, but not how much you have permission to spend. If you carry a balance, it should be less than 30% of your credit limit. If you are using most of your credit limit, this can be a red flag that you are a risk for default and it can pull down your credit score.

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The information contained within this article was accurate as of April 24, 2012. For up-to-date
information on any of the terms, cards or offers mentioned above, visit the issuer's website.

About Lynn Oldshue

Lynn Oldshue has written personal finance stories for for twelve years. She majored in public relations at Mississippi State University.
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