Mark Twain said there are two constants in life, “death and taxes”, to which coincidentally are the two things we as human beings have yet to truly understand, recuperate, or live with. It’s safe to say adding credit cards to this list would give it a much more modern touch.
That is, credit cards are now as much a requirement for adult life as a piece of photo identification, or a social insurance number. They are necessity for living, transportation, and social outings. According to the Maslow’s “Hierarchy of Wants and Needs” the bare minimum for survival entails food, shelter, safety, interaction, and warmth, all of which are largely covered by our modern credit cards – mortgages, monthly bills, and, well, those social adventures mentioned above.
While they are necessity, we have yet to truly understand how to manage our cards. The age old tales of maxing out cards, identity theft, impulse deals (and, likewise, scams),
How To Avoid The Pitfalls Of A Credit Card
A credit card can be a very useful means to build credit, accumulate rewards, and conveniently make purchases at retail stores and online merchants. However, if not used with care, the dark side of a credit card can come to light: unmanageable debt and credit problems. The following “credit card don’ts” will help you keep your spending in check while maximizing the benefits of your card.
1) Don’t spend money you don’t have
It’s easy to think “I’ll pay it off later”, however it’s just as easy to start seeing your spending balloon out of control. Credit cards charge a relatively high interest rate (compared to other borrowing sources like a mortgage, line of credit, etc.) on the unpaid balance, so it is better to hold off on your purchase until you have the money in the bank to pay off the balance at the end of the month to avoid the interest charges.
Tip: Pay close attention to where your money goes each month, build a realistic budget that accurately reflects your lifestyle and income.
2) Don’t always make the minimum payment
Just because you have the option to make a minimum payment doesn’t mean you should take advantage of this feature. Ideally you should pay the full balance by each payment due date, or pay the most you are able to afford.
Most credit cards have an interest rate of close to 20 per cent on outstanding balances and making the minimum payment of 3 per cent will result in a larger percentage of the payment going towards interest and less towards the principal. This means it will take you longer to pay off the credit card.
Tip: Look at your credit card statement. All statements are required to include an estimate of the length of time it would take to pay off the balance in full if you paid only the minimum amount required each month. You’ll be shocked how long it can take even on the smallest of balances.
3) Don’t get the highest possible credit limit
Most people don’t need a $25,000 limit, so keep the limit reasonable. In fact, having a high credit limit can actually make it difficult for you to obtain additional credit products later on. Why? Because, lenders look at your existing total available credit when deciding to extend you more credit; with an excessively high credit card limit the potential exists that you could max-out your card(s) and not be able to make payments on the new credit product.
Tip: Building a credit score is a important, ensure that the limit you decide to set is appropriate to your lifestyle. Making sure the limit is realistic in terms of your income, and how much can be paid off each month is important.
4) Don’t let balance transfer special offers lure you in
If you are carrying a large balance on your credit card, you may be tempted by credit card companies offering special teaser rates on balance transfers. After all, why pay 20 per cent interest when you can get a 5per cent teaser rate with a different issuer? Well…
You would have to apply for the new credit card which could negatively affect your credit score. Now, what happens when the teaser rate expires (and most do)? If you haven’t paid off your outstanding balances, you’ll incur much higher interest costs.
Tip: You’re probably better off getting a fixed installment plan for your debt and only use your credit card as a way to make purchases that you’re able to pay off right away.
To learn more about introductory offers, read “The ABCs of credit cards”.
5) Don’t get store credit cards to take advantage of one time small discounts
You’ve probably been offered countless special promotions- such as 10 per cent off a purchase if you apply for a new store credit card. Even though it can seem attractive, you should keep in mind that when applying:
- there could be a negative affect on your credit score if you already have a lot of available credit already, or if you apply for credit too often
- the more cards you have the harder it becomes to manage them
Tip: Remember, only get a store credit card if you frequent the store often and can take advantage of long term savings; don’t let a one-time savings offer sway your decision.
6) Don’t make online purchases with unreputable merchants
Credit card fraud is an increasing trend, making it easy for your credit card to be compromised. When buying online, be careful. Security certificates should be available on the website you are purchasing from, and third-party customer reviews can help ensure that you’re dealing with a reputable merchant.
Tip: If at any time you are not sure about the credibility of the website, buy the item elsewhere.
To learn more about how you can prevent credit card fraud, read “How to avoid being a victim of credit card fraud”.
Knowing how you can negatively impact your credit score through overuse of a credit card, signing-up for more credit cards by relying on discount deals with minimal rewards, and by giving your credit information to untrustworthy websites, are all important credit issues to consider in your financial endeavours. Fortunately, with a mindful budget and appropriate savings plan, managing your finances and maintaining a high credit rating is a not only possible , but realistic.