6 Easily Made Credit Card Mistakes That Could Land You in Financial Trouble
Credit cards offer unbeatable convenience when it comes to making payments, both online and offline, and for quickly accessing extra funds when you’re short of cash. However, it’s also possible to get into financial difficulty extremely quickly if you use your card in the wrong way. Here are six mistakes to avoid if you want to enjoy your credit card’s convenience without risking its dangers.
Making Late Payments
The cardinal rule of credit card use is to always pay your bill on time. A late payment will result in a costly penalty fee, but the consequences can be much more serious than that. If you regularly make late payments, you may find your credit limit is severely limited, making your card account less useful. Worse, you may find that your account’s APR is hiked upwards, making servicing your debt more costly. Finally, you could find your account frozen entirely, meaning you are unable to use the card in future, while still being fully responsible for clearing any outstanding balance at a punitive interest rate.
Only Making Minimum Payments
Paying on time is only the first step towards safe card use. If you set up an automatic payment for the minimum amount demanded on each statement, you’ll avoid any of the dangers of late payments, but you’ll also wind up paying excessive amounts of interest. With most cards, the minimum payment barely covers the interest charges on the account balance, leaving the principal debt largely intact. The result is that your debt will last almost indefinitely, with nearly all of your repayments swallowed up by interest, month after month. Paying even a little extra whenever you can will shift the balance in your favor, making inroads into your debt as well as covering the interest charges.
Although using a credit card to withdraw money from an ATM is useful in an emergency, it should definitely not become a regular means of accessing cash. The interest rate charged on cash withdrawals (and credit card ‘convenience’ checks, for that matter) is usually a lot higher than the more attractive headline rate applied to purchases. What’s more, cash withdrawals aren’t always subject to the interest-free grace period that’s standard for purchases, and so even if you clear the debt in full every month, you’ll still have to pay interest on the amount you’ve withdrawn.
Mixing Balance Transfers and Spending
A 0% deal on balance transfers can save you a welcome sum of money if you have a large debt on another card. However, to make the most of this feature, it’s essential to avoid using the same card for purchases. Not only will your monthly payment not be as effective in reducing your debt within the interest-free period, but with many card accounts your least expensive debt is cleared first. This means that all your payments go towards reducing the 0% balance transfer total, while your purchase debt continues to attract full interest month after month.
Sometimes, credit cards make paying for purchases far too simple. Handing over a card or typing your details into a website feels very different from using real money, and it’s easy to buy something on impulse, only to regret the cost when your statement arrives. Avoid temptation by not keeping your card with you at all times, so that using it requires at least a small pause for thought.
Paying for Essentials
Credit of any kind is a poor way of handling life’s essential expenses, and is a clear sign of a broken budget if it becomes a habit. If your credit card has a cash back or rewards feature, then by all means move as much routine spending as possible onto it to take full advantage, but make sure you clear your balance in full every month, or the interest charges will wipe out any gains. Otherwise, consider using a debit or charge card for day-to-day transactions, so there’s no risk of running up a debt.
Credit cards are an undoubted financial success story, with a majority of adults now using them regularly. However, to fully enjoy their benefits, you need to use them wisely, or you may find you’re paying a heavy price for the privilege of plastic.