Credit cards can be a boon to consumers, providing many advantages and benefits. Because they’re such a great alternative to cash, they’re great if you need to make purchases when you find yourself in a pinch. Some cards offer perks like rewards like cash back or travel miles, while others give you some added protection for your purchases. If you play your cards right and pay your balances off each month, you’ll never have to pay a dime in interest. Plus, being a conscientious credit card user can help boost your credit rating. However, these little pieces of plastic can also be a curse, especially if you’re already swimming in debt or just don’t know how to keep a handle on your finances.
Thousands of consumers have trouble getting their credit card balances under control. If you’re among these consumers, don’t despair. You’ll make your debt more manageable once you choose to change your spending habits.
Take a giant step in this direction by avoiding—or stop doing—these six major credit card mistakes.
1. Only Paying the Minimum Balance.
It’s tempting to send in minimum monthly payments—often $15 to $25—when you’re under financial duress. Don’t do it. High-interest rates charged by credit card companies will keep the bill growing every month. Instead, send the highest payment you can afford and reduce spending in other areas to focus on paying off the debt. It might be worth going without extras like the newest smartphone or latest fashion if it means you’ll sleep easier at night, knowing you’ll soon be debt free.
It may not feel like you’re saving money when you increase credit card payments, but you are. Depending on the interest rate, you’ll save an average of 10% to 29% per year in interest on any balance you pay off. For example, if you pay off an extra $1,000 this year, you’ll come out $160 to $290 ahead, depending on the rate.
Money is probably already tight if you’re already in debt, so freeing up extra cash will give you some breathing room for the long haul. Whether you use this money to accelerate debt payments, start an emergency fund or invest in retirement. The power of compound interest will start working in your favor instead of against you.
2. Using a Credit Card for Everyday Items.
Another trap people often fall into is using their credit cards for regular, everyday purchases. Unless you follow a monthly budget and can easily pay your credit card balance in full each month, charging non-discretionary expenses on a credit card can be dangerous. By keeping common purchases like groceries and utility bills off of your credit card balance, you’ll take a major step in getting spending under control.
Consider that a $3 gallon of milk bought with a credit card will eventually turn into a $30 gallon if you don’t pay off the balance at the end of each month. There’s no reason to incur interest charges on necessary items that you should buy directly with monthly income with cash, check or debit card.
3. Chasing Credit Card Rewards.
Credit card rewards are usually worth far less than the extra interest you’ll accrue if you can’t pay off the money you spend to earn those bonuses. You may, for example, receive one point for each dollar you spend, but you’ll probably need to redeem 5,000 points to get a $100 discount on a plane ticket. Since the interest charged on outstanding account balances often exceeds the typical 2% bonus, it may not be a worthwhile trade-off.
You should also avoid signing up for multiple credit cards, regardless of bonuses. If you already know you don’t manage credit cards well, don’t add temptation in the form of additional cards. It’s also easier to miss a payment deadline when you have more cards than you can manage. Remember, a few late fees or interest payments will quickly obliterate those sign-up gifts or rewards.
You can use your cards more frequently once you have your debt paid off and know how to avoid new debt. As long as you pay your balance in full and on time each month, there is nothing wrong with using credit cards instead of carrying cash or to take advantage of rewards like cash back or frequent flier miles. Just make sure those purchases fit within your monthly budget.
4. Taking Cash Advances
Credit card companies employ tactics like sending checks in the mail, encouraging you to use them to pay bills or to treat yourself to something nice, but they rarely make it clear that these checks are treated just like cash advances. Taking a cash advance is dangerous because you start to accrue interest immediately, unlike regular credit card purchases. In addition, there’s often no grace period and you’ll be charged an automatic fee that can run as high as 4% on the amount of the advance. To add insult to injury, the credit card company may not consider the cash advance to be paid off until you’ve zeroed out the balance for your other purchases.
The best thing to do with these checks is to shred them as soon as you receive them, avoiding the temptation while preventing would-be identity thieves from snagging account numbers out of the trash. Many companies also send a personal identification number (PIN) shortly after you sign up for a card, hoping you’ll use it to get cash from an ATM. Shred that paper, too.
5. Using a Credit Card to Pay Medical Bills
Medical bills can be overwhelmingly expensive, especially if you’re uninsured. If you’re having trouble paying your medical bills, negotiate an agreement with the hospital or other company to whom you owe money. Don’t add to your bills and stress by adding exorbitant credit card interest rates onto them. You should also go through your medical bills a second or third time, making sure they are accurate and you understand all the charges.
6. Ignoring Your Debt
Some folks get so stressed out or embarrassed by credit card debt they stop opening their bills and pretend there’s no problem. It’s obviously a bad approach because, while you’re ignoring the bills, the ticking time bomb of interest rates is adding to the debt. In addition, if you miss a payment or two, the interest rate may shoot higher under the terms of the card agreement.
You can call card companies if you feel overwhelmed and ask to renegotiate the terms of your agreement. You may be able to get the interest rate lowered, set up a payment plan, or get some of your debt forgiven. If your first call doesn’t work, keep calling back because a different customer service representative may allow you to negotiate a better deal.
Ignoring debt can also lower your credit score and spur debt collectors into action. With unsavory tactics often employed in this industry, you don’t want to do anything that puts you on their radar.
Finally, don’t let embarrassment prevent you from taking action. You may assume that everyone else has their finances under control, but many other consumers face similar debt problems.
Other Mistakes to Avoid
Don’t make late payments. Doing so will damage your credit score and will also incur late payment charges on your account. Your credit cards will likely have a regular due date every month—say, the 15th of each month—and it rarely deviates. So it’s important to know when your bill is due. If you have trouble remembering when your payment is due, try adding a reminder on your phone or computer, or circling the dates on a calendar that’s easily accessible.
Maxing Out the Credit Card Credit Line
If you don’t have the money to make payments, you shouldn’t be using the credit card—and you shouldn’t be maxing it out. Remember, credit cards also charge over-limit fees, so if you fall behind on your payments, the interest will kick you over your limit and you’ll have to pay more in fees.
Not Understanding Terms of the Account Agreement
Banks and credit cards supply the terms and conditions of specific cards at the time the application is completed and when the card is issued. It’s important to know what these terms and conditions are before you use the card. Doing so will help you have a better handle on what’s expected of you from the credit card issuer, and it will also help you manage your spending habits better.
The Bottom Line
Cleaning up credit card debt takes time and self-control, but the steps outlined here aren’t difficult to follow. Credit cards become helpful and convenient financial tools once you overcome debt and learn to use them sensibly and responsibly. Avoiding these common mistakes can put you on the right path.