Credit cards can be a boon to consumers, providing many advantages and benefits. Because they're such a great alternative to cash, they're great if you need to make purchases when you find yourself in a pinch. Some cards offer perks like rewards like cash back or travel miles, while others give you some added protection for your purchases. If you play your cards right and pay your balances off each month, you'll never have to pay a dime in interest. Plus, being a conscientious credit card user can help boost your credit rating.
However, these little pieces of plastic can also be a curse, especially if you're already swimming in debt or just don't know how to keep a handle on your finances. Thousands of consumers have trouble getting their credit card balances under control. If you're among these consumers, don't despair. You'll make your debt more manageable once you choose to change your spending habits. Take a giant step in this direction by avoiding—or stop doing—thesesix majorcredit card mistakes.
Key Takeaways
- There are a series of common mistakes people make when they use their credit cards which can cause huge problems with their finances.
- Making minimum payments only and using cards for everyday purchases are two of the most common mistakes.
- The benefits of rewards can be small, while cash advances can be costly.
- Never pay your medical bills with your credit card and be sure you never ignore your debt.
Only Payingthe Minimum Balance
It's tempting to send in minimum monthly payments—often $15 to $25—when you're under financial duress.Don't do it. High-interestratescharged by credit card companieswill keep thebill growing every month. Instead, send the highest paymentyou can afford andreduce spending in other areas to focus on paying off thedebt. It might be worth going without extras like the newest smartphoneor latest fashionif it means you'llsleep easier at night, knowing you'll soon be debt free.
It may not feel like you're saving money when you increase credit card payments, but you are. Depending on the interest rate, you'llsavean average of 10% to 29% per year in interest on any balance you pay off. For example, if you pay off an extra $1,000 this year, you'llcomeout $100 to $290 ahead, depending on therate.
Money is probably already tight if you're already in debt, so freeing up extra cashwill give you some breathing room for the long haul. Whether you use this money to accelerate debt payments, start an emergency fundor invest in retirement. The power of compound interest will start working in your favorinstead of against you.
Using a Credit Card for Everyday Items
Another trap people often fall into is using their credit cards for regular, everyday purchases. Unless you follow a monthly budget and can easily pay your credit card balance in full each month, charging non-discretionary expenses on a credit card can be dangerous. By keeping commonpurchases like groceries and utility bills off of yourcredit card balance, you'll takea major step in getting spending under control.
Consider that a $3 gallon of milk boughtwith a credit card will eventuallyturn into a $30 gallonif you don't pay off the balance at the end of eachmonth. There's no reason to incur interest charges on necessary items that you should buydirectlywith monthly income with cash, check or debit card.
ChasingCredit Card Rewards
Credit card rewardsare usually worthfar lessthan the extra interest you'll accrue if you can't pay off the money you spend to earn thosebonuses. You may, for example, receive one point for each dollaryou spend,but you'll probably need to redeem 5,000 points to get a $50 discount on a plane ticket. Sincethe interest charged on outstanding account balancesoften exceeds the typical 2% bonus,it may not be a worthwhile trade-off.
You should also avoid signing up for multiple credit cards, regardless of bonuses. If you already know you don't manage credit cards well, don't addtemptation in the form of additionalcards. It's also easier to miss a payment deadline when you have more cards than you can manage. Remember, a few late feesor interest payments can quickly obliterate thosesign-up gifts orrewards.
You can useyourcards more frequentlyonce you have yourdebt paid off and know how to avoid new debt. As long as you pay your balance in full and on time each month, there is nothing wrong with using credit cards instead of carrying cash,or in taking advantage of rewards like cash back or frequent flier miles. Just make sure thosepurchases fit within your monthly budget.
TakingCash Advances
Credit card companies employ tactics likesendingchecks in the mail, encouraging you to use them to pay bills or to treat yourself to something nice, but they rarely make it clear that these checks are treated just like cash advances.Taking a cash advance is dangerous becauseyou start to accrueinterest immediately,unlike regular credit card purchases. In addition, there'soften no grace period and you'll becharged an automatic fee that can run as high as 6%on the amount of the advance. To add insult to injury, thecredit card company may notconsider the cash advance to be paid off until you've zeroed out thebalance for your other purchases.
The best thing to do with these checks is to shred them as soon as you receive them, avoiding thetemptationwhilepreventing would-be identity thieves from snagging account numbers out of thetrash. Many companiesalso send a personal identification number (PIN) shortly after you signup for a card, hoping you'll use itto get cash from an ATM. Shred that paper, too.
Using a Credit Card to PayMedical Bills
Medical bills can be overwhelmingly expensive, especially if you're uninsured. If you're having trouble paying your medical bills, negotiate an agreement with the hospital or other company to whom you owe money. Don't add to your bills and stress by adding exorbitant credit card interest rates onto them. You should also gothrough your medical bills a second or third time, makingsure they are accurate andyou understand all the charges.
Ignoring Your Debt
Some folks getso stressed out or embarrassed bycredit card debt that they stop opening their bills and pretend there's no problem. It's obviously a bad approach because, while you're ignoring thebills, the ticking time bomb of interest rates is adding to thedebt. In addition, if you miss a payment or two, the interest rate mayshoot higher under the terms of thecard agreement.
You can callcard companiesif you feel overwhelmed and ask to renegotiate the terms of your agreement. You may be able toget theinterest rate lowered, set up a payment plan, orget some of your debt forgiven. If your first call doesn't work, keep calling back because adifferent customer service representativemay allow you to negotiate a better deal.
Your credit card issuer may be willing to negotiate the terms of your agreement.
Ignoring debt can also lower your credit scoreand spur debt collectors into action. With unsavory tactics often employedin this industry, you don't want to do anything thatputs you on their radar.
Finally, don't let embarrassment prevent you from taking action. You mayassume that everyone elsehas their finances under control, but many other consumersface similar debt problems.
Other Mistakes to Avoid
The mistakes listed above are some of among those most frequently made by consumers. But there are others.
Late Payments
Don't make late payments. Doing so will damage your credit score and will also incur late payment charges on your account. Your credit cards will likely have a regular due date every month—say, the 15th of each month—and it rarely deviates. So it's important to know when your bill is due. If you have trouble remembering when your payment is due, try adding a reminder on your phone or computer, or circling the dates on a calendar that's easily accessible.
Maxing Out the Credit Card Credit Line
If you don't have the money to make payments, you shouldn't be using the credit card—and you shouldn't be maxing it out. Remember, if worse comes to worst, credit card issuers can also charge over-limit fees to those who opt-in to exceed their credit limits.
Not Understanding Terms of the Account Agreement
Banks and credit cards supply the terms and conditions of specific cards at the time the application is completed and when the card is issued. It's important to know what these terms and conditions are before you use the card. Doing so will help you have a better handle on what's expected of you from the credit card issuer, and it will also help you manage your spending habits better.
Is it bad to use a credit card?
Credit cards are financial tools; their value depends entirely on how they are used. If used responsibly, credit cards have many benefits like convenience, security from fraud, and bonus rewards. When used irresponsibly, credit card debt can add enormous financial weight to a person's life.
Should I use credit card for medical bills?
It depends. If you know you can pay off your medical bills at the end of the month, a credit card is a fine option for payment. However, if you won't be able to pay it back on time, the interest on a hefty medical bill can quickly overwhelm you. It's a better idea to create a payment plan or other negotiation with the medical provider.
Are credit card rewards worth it?
Credit card rewards are a welcomed bonus when the credit card isn't adding any financial stress in your life. However, the rewards aren't worth it if using a credit card is putting you further into debt.
The Bottom Line
Cleaning upcredit card debt takes time and self-control, but the steps outlined here aren't difficult to follow. Credit cards becomehelpful andconvenient financialtools once you overcome debt andlearn to use them sensibly and responsibly. Avoiding these common mistakes can put you on the right path.
