Credit cards are potentially dangerous, especially for new credit card users, who can be fascinated by the allure of what appears to be “free” money. Even some experienced credit card users still fall into credit card traps. If you are thinking about getting a credit card – or wondering or dropping your credit cards – understanding the dangers that come along with credit cards can help you cultivate better credit card habits. Also know that there is a way to use credit cards responsibly and prevent the traps that so many consumers have fallen.
The temptation to over-spend
Studies show that consumers spend more when paying with a credit card than when paying with cash. In one study, the participants were willing to spend as much as double the amount when using credit cards versus using cash. It’s easy and convenient to spend money with a credit card, and you don’t feel like the “pain” of cash leaving your wallet. It may explain the amount of credit card debts.
How to Avoid Them: Set a personal spending limit with your credit card, even if it is below your credit limit, based on how much you can afford to pay on your credit card every month. Be careful not to spend too much money on a lifestyle that you really cannot afford or to impress people with your plastic life.
Interest makes it harder to pay from the Balance
Paying credit card balances in full each month can prevent you from paying any interest at all. If you do not pay your balance in full, then part of every payment goes to the interest payments increasing the amount of time it takes to pay your balance.
How to avoid them: Pay your balance in full to avoid paying any interest on purchases. If you cannot pay in full, you can recharge more than you can afford to pay, but pay as much as you can each month until you have zeroed your balance.
Risk of getting into debt
Every time you borrow money, you are making debts. The more you borrow, without repayment, the deeper you go into debt. Debt leads to a large number of other problems and not all of them financially. Guilt can lead to stress, depression, other health problems, and in some serious cases, even suicide.
Once you get into debt, achieving your other financial goals is much harder. Spending money on the debt leaves you with less money for other priorities, such as saving for retirement or summer holidays. You may have to slow down your educational goals or feel trapped in a job that you don’t like because you need to pay your bills.
How to Avoid Them: Recognize the signs that you are on your way to credit card debt, especially unable to pay your balance in full each month. Stop using your credit cards and keep focus on living within your means of getting in over your head.
Risk of ruining your credit score
Credit cards have a major impact on your credit score. Use your credit card wisely, and you are on the way to a big credit score. But, if you make a mistake – just like miss a payment for 30 or more days – your credit score will take a hit. The more you mess up, the more your credit score to fall.
How to Avoid Them: The best way to build and protect your credit score is to pay your credit card on time, less than 30 percent of your credit limit to keep your balance, and minimize the credit card applications you create.
Minimum Payments Make a false sense of security
Your credit card company requires that you only make a small payment each month to avoid late fees and to keep your account in good condition. Unfortunately, in addition to making no payment at all, minimum payments are the worst way to pay your balance. You will spend more time paying your balance and paying more interest if you only make the minimum payment.
How to Avoid Them: Paying your balance in full is ideal, but if you cannot pay off your entire balance, pay more than the minimum to get rid of your balance faster and get the amount of interest you generally to pay.
Confusing Credit Card Terms
While credit card terms have become a lot clearer thanks to the Credit Card Act of 2009, there is still a lot of confusion with credit card offers. Knowing a single credit card can have different interest rates and what rate may be confusing. such as increased costs or interest or damage to your credit – Misunderstanding your credit card terms can have serious consequences.
How to Avoid Them: Understand the different types of balances you can perform on your credit card and the interest rate that applies to each. Read through your rewards program to learn what purchases earn rewards. Contact your credit card customer service with questions about your credit card.
Harder to Track spending, especially across multiple credit cards
Keeping track of your spending is a foundation of a healthy financial life, but adding credit cards to your usual spending methods can make it harder to keep up with all your spending. It is especially the case if you use your credit cards, along with cash and payment cards, and if you use multiple credit cards. It is one of the reasons credit cards make it so easy to spend too much.
How to Avoid Them: Using more cards means that you have to look in different places as you keep track of your expenses. You can manually keep track of spending diary or spreadsheet, or use a personal finance software such as Mint or Quicken to help keep track of your expenses.
Credit Cards come with a credit card fraud risk
To a certain extent, anyone with a credit card is at risk of being a victim of credit card fraud. Your credit card itself can be stolen, or a thief can steal your credit card information from a company that you have shopped with. Fortunately, your liability for fraudulent credit card purchases is limited, but you have to report these costs quickly.
How to Avoid Them: Monitor your credit card often and report a missing credit card or suspicious charges immediately.