Properly employed, credit cards can be useful tools. However, the key phrase in that previous sentence is “properly employed”. Too many people use credit cards without a strategy — or worse — a clear understanding of how they work. To save you that pain, let’s take a look at some common mistakes people make with credit card debt.
Carrying Debt From Month to Month
The first big mistake is carrying any credit card debt at all. When you use a credit card to make a purchase, it is critical to ensure the debt is one you can pay in full before the due date. This will enable you to avoid interest charges on the purchase.
Some credit card interest rates can be exceptionally high, we’ve seen them ranging up to 26%.
Moreover, that interest compounds monthly. So if you don’t pay it off in full one month, the amount gets added to your balance. The interest for the following month is then calculated based upon that new balance.
In other words, yes, you’ll pay interest on the interest. Moreover, it continues in that fashion each and every subsequent month in which a balance is brought forward.
Making Minimum Monthly Payments
This one goes hand in hand with the one above. If you do not pay your balance in full, the balance grows. Credit card companies are well aware of this, so they tease customers with attractive low monthly payments.
However, the longer it takes to pay off the balance, the more money the card issuer will make in interest payments. Thus, those “generously affordable” minimum monthly payments are calculated specifically to stretch the debt out for as long as legally possible.
The longer you pay, the more you’ll pay.
And, before you know it, that debt could snowball into full-fledged credit card trouble. You can learn more about this — and what to do if it has already happened — at Freedom Debt Relief.
Assuming you’re making a large purchase and you have the wherewithal to make it in cash, it’s a smart play to use your rewards card to get the points. Just make sure you pay off that balance before the due date to avoid interest charges.
However, too many people use credit cards just to get the points and make monthly payments on the resulting balance. The problem with that approach is you’ll have paid for whatever reward you get many times over by the time you’re done making interest payments.
Remember, there are no free lunches.
If you thought 26% sounded high on purchases, wait until you get a load of the 30% interest charges applied to some cash advances. Moreover, the due date on a cash advance is the day you take it, which means interest begins to accrue on that obligation immediately. Most issuers charge cash advance fees as well.
Simply put, this is some of the most expensive money you can borrow.
Some credit card issuers will dupe card users into taking cash advances by sending them “checks” they can use to make purchases, or pay bills. Those checks are, in fact, cash advances. Moreover, those checks enable anyone to gain access to your credit card account. All they have to do is write the check to themselves.
Destroy them immediately upon their arrival to avoid the temptation.
It’s also important to read your cardholder agreement carefully when it comes to cash advances. In some cases, monthly payments made to the card company will go first to satisfy purchases, leaving that cash advance balance on the books accruing that elevated interest rate until all of your purchase charges are paid in full.
Exceeding the Credit Limit
Credit bureaus keep a close watch on the way you use your cards. The data they glean from doing so factors into determining your credit score. Generally speaking, you’ll need to keep your credit usage below 30% of the credit available to you.
Go beyond that marker and your credit score will take a hit.
Meanwhile, the card issuer doesn’t mind you doing that at all. The more you owe, the more they’ll charge you in interest payments — until you exceed the limit of the card. Then they’ll get irritated and charge you extra fees, as well as bump up your interest rate.
This one brings us full circle. Paying your credit card bill late will trigger late fees and an interest rate increase. Even if all you can do is make the minimum payment, always pay your credit card bill before it’s past due.
These are six of the most common mistakes people make with credit card debt. As you can see, each one of them will cost you money in the long run. Some will even degrade your credit score.