If you’re walking around Walmart or any other major shopping store you probably don’t have a wallet stuffed with a thousand dollars in cash. However, should you see a 65-inch flat screen TV you like, you could actually bring it home within minutes with one swipe of your credit card.
Credit cards are the most convenient, most ubiquitous method of payment we have. There was a time their use was limited to certain retail stores. Now you can use them almost anywhere. Coffee shops take credit cards. Fast food restaurants take credit cards. There are probably some garage sales equipped to take them now.
With this increased convenience comes an increase in potential pitfalls of credit card use. Before you swipe, make sure you don’t make these common credit card mistakes.
It can be too easy sometimes. You want something. All you have to do is swipe that card, and it’s yours. It almost feels like it’s free, but it certainly isn’t. You are going to have to pay for those clothes, that computer, that gaming system. Not only will you have to pay for it, you are going to pay interest on it as long as the balance is unpaid.
Ideally, you should not charge more than what you can pay off each month. Yes, emergencies will arise. Having the newest techno gadget is not an emergency. Showing restraint will give you the credit you may need when unexpected financial demands arise.
Ignoring Your Statement
Be sure to check your statement each month, whether it comes in the mail or whether you can view it online. If you don’t, you may miss fraudulent activity, payments which may not have been credited to your account, or fees you did not authorize by your card issuer. Read and understand your statement. It’s your money. Make sure you keep an eye on it.
Maintaining a Balance
Credit card companies compete for your business, so many have no annual fee. If you pay no annual fee, and you pay your balance off each month, you are using your credit card for free. However, once you maintain a balance after the grace period, you will accrue interest charges.
That is what the credit card company is hoping for because that’s the most common way for them to make money. Pay off your balance each month to avoid interest payments and potential late fees, and compound interest on top of them.
Making Only Minimum Payment
You may owe $1,500.00 on your statement. But your credit card company says it’s OK to just send them $30 that month. Seems tempting. This can give you some financial breathing room for the month. However, if you continue to do this, you will be paying only the interest charges and not the principle, the amount of money you charged in the first place.
Depending on how your minimum fees are calculated you could make your minimum payments each month, and after an entire year, have no appreciable reduction in your balance. Never mind that you will likely continue to make charges.
Better to pay at least the minimum fee on your credit card than to pay late. When you pay late, you get reported to the credit bureaus, and your credit rating will suffer. You will incur late fees, according to your card member agreement. If your balance and late fees are not paid off, you will incur interest payments not only on the balance but on the late fees as well.
Maxing out Your Limit
Credit cards are a convenient tool, but they have their limits. If you max out your credit limit, you will have no room to deal with emergencies. Also, having a balance beyond 30% of your credit limit can damage your credit score and make you appear to be a riskier borrower. If you are finding your balance rising, you are living beyond your means. Make adjustments as soon as possible.
Having Too Many Credit Cards
Once you have one, you will get flooded with offers to get another. Credit card companies make it quite easy for you to be approved, even without proof of employment. You will have another credit card in your mailbox in no time. Then what? More debt.
Your credit rating will suffer, and you may find yourself in irreversible financial hardship. There are times when credit cards offer “balance transfers” where you can move your higher interest rate credit card debt to a lower interest rate card, usually for a specified time period. This can be useful in the short term, but if you don’t pay off your balance, you may be worse off financially than you were before.
Credit cards are a convenience. Keep telling yourself that. They are not free money, not magical purchasing power. They are simply a contract between you and a lending institution which makes it easier to buy things. You still have to pay for them. And if you aren’t careful, you will be paying for a lot more than just what you bought with them. Don’t end up working for your credit cards. Keep your spending under control and make them work for you.
Anum Yoon recently joined the blogging bandwagon to write about money management, frugal advice, and financial trends. She started and maintains her personal finance blog, Current on Currency. You can also sign up for her newsletter to read her weekly updates.