Despite great claims to make life easier, credit cards often have a way of making life more difficult. Much more difficult in many cases. Credit card companies make a lot of tempting promises but the truth is: these promises arenâ€™t guaranteed to pan out. Using a card to buy a new gadget gives you the freedom to add material goods to your life, but we often forget one thing â€“ until paid off, these are essentially borrowed items.
Additionally, 0% APR deals eventually expire and unless you can pay off your balance that means youâ€™ll be making interest payments on your borrowed cash.That financial freedom that credit cards seem to offer can just as easily be turned into a financial cage.
On top of it all, many consumers arenâ€™t even aware of some of the sneakier details that are keeping them in debt. Thatâ€™s why itâ€™s crucial to understand the terms behind your plan to avoid prolonging your repayment.
Here are 6 mistakes to avoid as you assess (or reassess) your relationship with credit cards:
1. Making minimum payments
If youâ€™re only making minimum payments each month then youâ€™ll probably be staying in debt for longer than youâ€™d like to be. Minimum payments generally cover interest accumulated over the previous month and a small percentage of your principal balanceâ€¦ but not much more. Not only will it take you longer to pay off your debt, it will cost you more in the long run! Simply put: minimum payments donâ€™t work to your financial advantage.
Remember, minimum payments are only suggested payments. Itâ€™s at your discretion to pay off your debt or increase your monthly payments when and where you can. While some people arenâ€™t in a financial position to pay off more than the minimum, if you can pay above the minimums, you should do it!
2. Not negotiating a lower rate
Negotiating (and locking down) a lower rate is a surefire way to lower your interest payments. This doesnâ€™t work every time but itâ€™s worth the effort, even if you only reduce your interest rate by a percent. These small adjustments make a difference for the overall health of your finances!
How about cards with a limited time 0% APR? You might still want to consider negotiating lower rates before introductory no interest period runs out. In the event that youâ€™re unable to make a payment at some time in the future, youâ€™ll appreciate the lower rate. The lower your interest rate the less your bank account will feel the charges.
3. Using credit solely for the rewards
Credit card rewards sound so tempting â€“ but thatâ€™s because theyâ€™re supposed to! Card companies pull out every trick in the book to incentivize potential customers and encourage customer loyalty. Who can deny the appeal of a free trip to Hawaii? But itâ€™s in the fine print that you start to understand the catch: in order to get most of these rewards you have to do a lot of spending with your credit card. By consequence, that means racking up a lot of debt.
For example, say you open a cash back rewards credit card. It gives you 1% cash rewards for every purchase that you make. That means $1 for every $100 that you spend, and $10 for every $1000 that you spend. While this is a potential financial bonus â€“ you still have to spend $1000 to get $10. Monthly interest charges alone can easily offset the small reward â€“ especially if you have a high interest rate card. Consider that carrying a $1000 dollar balance on a 12% APR card will result in a monthly interest charge of $120.
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4. Ignoring statements
Opening credit card statements can be frustrating and even scary. But one thingâ€™s for certain â€“ ignoring your due dates wonâ€™t make them go away.
The ease of swiping is one of the most dangerous things about credit cards. Since money isnâ€™t immediately coming out of your bank account the act of spending feels very abstract. But using your credit card without paying it off each month will result in you paying interest (again, even 0% APR deals end) and therefore a premium on the money that youâ€™ve borrowed.
Open any and all statements you receive in your inbox or mailbox. This habit keeps you honest about what youâ€™re charging on credit and also keeps you abreast of any suspicious activity on your card. Then, you can spot fraudulent purchases or correct errors.
5. Spending above your credit utilization rate
Most people focus on not maxing out the total credit limit on a credit card but thereâ€™s another limit that you should be paying attention to: the credit utilization rate. Though most financial advisors advocate for keeping your ratio as low as possible, the general rule is that you stay below 30% of the credit available to you.
For example: with a card that has a $1000 line of credit, you should keep your charges below $300 at any given time, regardless of your confidence in paying off a higher balance. Beyond taking on debt, going beyond this recommended limit could also ding your credit score.
6. Closing an account immediately after paying it off
Imagine this: Youâ€™ve just paid off a credit card thatâ€™s been haunting you for years. After a quick congratulations, itâ€™s time to close that puppy downâ€¦ right? Not so fast. Your first impulse might be to shut down a newly paid off account to erase temptation and start fresh but doing so can actually lower your credit score. There are a few reasons why this might happen:
shutting down an account may lower your credit-to-debt ratio
if itâ€™s your only credit card, then you effectively close your entire payment history
if itâ€™s an older card, then you shorten your overall credit history
If youâ€™ve just paid off a card and you wish to stop using the available credit, cut up your card and stop all charges but keep the account open.
For just a piece of plastic, credit cards wield a lot of financial power. They may look innocent stacked up in your wallet but (and thereâ€™s always a but) they can do serious damage to your finances. As with any other responsibility, itâ€™s crucial that you take the time to understand the potential risks and put in the proper research before taking on any debt.
Image Credit: Matt Hintsa
This post was published by Claire, Content and Community for Â»Â ReadyForZero.
ReadyForZero is a company that helps people get out of debt on their own with a simple and free online tool that can automate and track your debt paydown.Download