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Credit cards are good tools for building a credit history and for improving your credit score. As long as you pay your bills on time and only use 5 – 10% of your approved credit, your score can actually improve with credit cards. However, despite these benefits there are pitfalls to avoid when managing your credit card accounts.
First, here are some statistics on personal debt in the U.S. (so you can see that you’re not alone)
The National Foundation for Credit Counseling, NFFC, released the 2018 Financial Literacy Survey and found;
- 1 in 4 Americans don’t pay their debt on time
- 1 in 10 Americans have debt in collection status
- 38% of Americans carry debt from month to month
These debt statistics are not encouraging. There are a lot of people falling into credit card debts. For people who are part of these numbers, their credit card debts can lead to a debt cycle that repeats itself. This can lead people to be unable to grow their finances or to save for retirement.
Bad debt situations can and should be fixed with some planning and time. For example, if you have too much debt, you can discuss a plan with your credit cards companies. Also, there is the option of using debt consolidation plans. It’s important not to give up and to try to get out of the debt cycle by being proactive.
Credit Card Mistakes to Avoid
These are 5 mistakes to avoid when using credit cards. Maybe you are making some of these mistakes, here is how to avoid them.
1.Using credit cards too often
Paying for your purchases on plastic, instead of cash can actually make you spend more. There are two reasons for this phenomenon.
First, using credit card is easier than using cash. You don’t have to make a trip to the ATM machine and then carry the cash. A card simplify things, including spending more.
Second, there is something called the Coupling phenomenon, according to psychologists. This means that when we pay with cash, we feel the pain right away. However, when we pay with credit card we don’t know how much we have to pay until we get the bill. Therefore, we postpone the pain. It’s much easier to go over our budget when we pay we credit card.
Survey after survey shows that when we use credit cards to pay for purchases, we actually spend more, lots more.
A study shows the correlation between credit card use and spending. The study was conducted in 2001, Drazen Prelec and Duncan Simester of MIT and published in Marketing Letters. They found we spend up to 100% more when using credit card to pay rather than using cash.
To avoid making extra purchases when paying with credit cards is best to stick to a budget. Another option is to pay with cash, at least sometimes and when feasible.
2.Maxing out your credit card balance
Using all of your approved credit can lead to a decrease on your credit score. This is a result of your utilization ratio going too high. It is recommended to stay below 30% of your approved credit, to maintain a healthy score. However, it’s best to use only 5-10% of your authorized credit.
Max out credit cards balances may cost you more. You can incurred a higher interest rate charge plus other fees. This will result in you paying more money and potentially placing you at more risk of experiencing credit problems.
To avoid maxing out your cards, stick to a budget and use cash whenever possible.
3.Making only the minimum payment
The minimum payment is only an option offered by your credit card company. You don’t have to stick to this amount, specially if you don’t want to pay more in the form of interest payments. Minimum payments can add to a lot of money over time, due to interest charges on the remaining balance.
Avoid the minimum payment trap. Try to increase your payment amount every month incrementally, $100, $150, $200 etc. If you are in a debt reduction program or any other type of debt management plan, you are probably doing this already.
4.Paying your bills late
Making your payments late will cost you money in late payment fees. However, worse than costing you more, late payments can hurt your credit score.
If you are in the habits of making late payments, your credit card company will report this to the credit bureaus. Generally, bills that are paid 30 or more days late will hurt your score.
Avoid late payments by setting up reminders to pay your bill. If you’re having problems putting the money together, start your process earlier.
5. Not understanding the terms of your credit card contract (or ignoring these)
“Any informed borrower is simply less vulnerable to fraud and abuse”.
The terms of a credit contract are the most important things to clearly understand to avoid violating them. Credit cards companies extend you credit and in return you must abide by the rules of the contract.
The terms can be found on the companies’ websites, usually in small print and at the bottom of the page. Also, you can call the company up and ask for the terms specifically.
These are some of the terms that you should try not to violate to avoid penalties, such as the report of your activities to the credit bureaus or extra charges to your account. Investigate these terms before signing up.
Credit card company Specific terms.
- Your card interest rate. Is it variable or fixed.
- Understand what 0% is and when does this change.
- The grace period. This is an extra number of days to pay your bill, beyond your due date, usually 15 days.
- When is your bill due.
Credit general terms.
- What balance transfer is.
- Is your reward card really worth it.
- Free membership vs paid membership.
- How credit cards affect your credit score.
The use of credit cards is a good way for building credit. Good credit is necessary for buying a house, a car and other large items. Good credit can also get you a better insurance rate and better loan terms.
In general, credit when used responsibly can improve your finances. Keep in mind those pitfalls above, to avoid getting in trouble with cards debt.
Reminder: You can order your credit report online and free from annualcreditreport.