Responsible use of credit cards involve a careful management of your monthly balance. A credit card can either be a useful or harmful tool depending on how you use it. Ask around and you will find that people have different opinions on whether credit cards are powerful or destructive financial tools.
However, there is no doubt that having a credit card provide perks like travel accident insurance and car rental insurance. It can also help you build credit and accumulate rewards points that can be cashed in.
But for people who lack self-control in making purchases, getting a credit card can turn out to be the first step to a slew of financial problems. Unfortunately, people do not become responsible credit card owner overnight. Many of us make mistakes in using our credit cards just because we do not know any better.
To improve your financial health, avoid the credit card mistakes outlined below:
Not shopping around
Before applying for a credit card, it is important to consider your lifestyle and your credit score. This will save you time from applying for the wrong card and getting rejected for cards that you do not qualify for.
Many credit card experts agree that it is a good idea to shop around before choosing a credit card. Getting informed on what other cards are out there is crucial because not every credit card is right for everyone. When shopping around for a credit card, make sure to compare the fees listed on each card, including cash advance fee, annual fee, and late payment fee. If you are looking to transfer your balance, it also pays to take a close look at the balance transfer fees.
Making late payments
Missing a payment for your credit card can have a big effect on interest rate and your credit report. A payment is considered late when you make it after the cutoff time on the due date. Even if it is only a minute after the cutoff time, the payment will be considered late.
Making late payments brings lasting damage because aside from being charged a late fee on your next billing statement, you also risk having your credit card company increase your interest rate. Late payments can also hot your credit score, which can in turn affect your ability to get a new credit card and to qualify for other loans.
Not taking advantage of your card’s interest-free period
An interest-free period is the amount of time that you will not be charged interest on a new purchase, provided that you pay the current statement and your previous balance in full by their due dates. It is linked to your credit card billing cycle and not the purchase date, so the interest-free days will depend on statement in a given time period.
To make the most of interest free periods, avoid using cash advances, and make it a point to pay your outstanding balance in full each month. You also need to know your billing cycle so you can time your credit card purchases to get the maximum benefit of the interest-free period.
Paying only the minimum payment due
Credit cards offer the flexibility to pay the lowest amount you can rather than paying the full amount due. But although it is the easiest payment, it is also the slowest way you can settle your credit card balance. If you are paying only the minimum amount each month, it could take years to pay off your balance. The longer you pay off your balance, the higher you spend in interest.
If your goal is to pay off your credit card balance sooner, consider increasing your payments until you are able to completely repay the balance. This way, you can save money in interest, and ease the burden of having a credit card debt that takes years to pay off.
If you find that you are unable to keep paying a higher amount each month, at least aim to pay off your carried over balance as soon as you can.
Using your credit card for most of your purchases overseas
Many people use credit cards as a mode of payment while travelling overseas because of the convenience it offers. Having a credit card rids you of the need to carry large amounts of money when you only intend to buy a few small items. But as convenient as it may sound, using your credit card overseas brings in extra charges on your next bank statement.
Before you give up using your credit card overseas, remember that you can get some perks from using the card. For instance, if you have a card that offers rewards on overseas spend, you will be eligible for cashback or miles.
Using credit card to withdraw cash
Many credit card owners fail to realize that withdrawing cash on their card carries high interest rates and cash advance fee. The interest rate for this type of transaction can be high as 26% per annum, and at times you can also be charged with a withdrawal fee that is equivalent to 6% of the amount you withdraw.
Another drawback of credit card cash advance is that the transaction is recorded on your credit report. This means that any potential lender can check the record and see the transaction as a danger sign. Instead of paying with cash, you can opt to use digital wallets and other e-payment methods.
Not tracking your rewards points
For people with multiple credit cards, it can be difficult to keep track of reward points and miles earned. Many credit card users who earn rewards points and travel miles choose not to use them so that they can cash in later on, and buy expensive goodies. But if you are not keeping track of the points you have earned, they can expire without you realizing it.
If this sounds like you, then you should consider getting a credit card with rewards points that do not expire. To maximize your rewards, you can also use smartphone apps that count your miles, cash back, and points.
It takes diligence to avoid making credit card mistakes. But once you develop the habit of paying on time, and spending only on items you can pay off, then you are well on your way to a debt-free life.