And how to avoid them!
Credit cards : The gateway to hassle-free online purchases, plane tickets around the world, fancy hotel bookings and many more options. Credit cards, a world where plastic is fantastic,…or is it?
The use of credit cards was not something I was exposed to very much during my childhood. Even as a teenager and student at university I thought that credit cards were for “rich” people that could afford all they wanted! (I could not be further from the truth though). I eventually got my first one in my senior year at university as I wanted to buy stuff online and open a PayPal account to facilitate payments. Since then I have luckily never had big issues with crazy late payments fees and/or inability to pay as I have been cautious all along. This is certainly a good thing but on the other hand this my does not make me an expert in the credit card department.
If you are struggling with credit cards use or are an everyday user, do not worry though! My friend Good Nelly from My Way of viewing is bringing us a guest post to help us avoid those common credit card mistakes we should not make.
Common Credit Card Mistakes
By Good Nelly.
Are You Aware Of The Common Credit Card Mistakes?
Banks and credit unions try to lure us with their exciting rewards and cashback offers! No doubt, having a credit card makes your life much easier as you can pay for your purchases later!
But this convenience doesn’t come free!
Many of us, who are using credit cards, make some common mistakes. In other words, some prevalent myths create smoke and mirrors about using credit cards.
For that, we have listed some of the common mistakes, which you should be aware of!
Making minimum payments only
The least amount you can pay towards your outstanding balance is your minimum credit card payment. And that too without being penalized with a late fee!
Usually, the minimum payment varies from 2% to 5% of the outstanding balance amount.
Let’s say, you have a $600 balance and your minimum payment is 4% of your balance. So, for making the minimum payment, you need to pay (600*0.04=) $24.
Well, till now you might find this minimum payment much lucrative! But, why shouldn’t you make only the minimum payment? You can have a better idea after going through the example below:
Let’s say, today, your outstanding balance amount is $1000 and the APR (Annual Percentage Rate) is 10%. And the minimum payment for your credit card is $50 for this month.
So, your outstanding balance would be 1000.27 till midnight of this day! But, how so? See the calculation below!
((10/100) * 1000)/365 = 0.27 (since total no. days in a year = 365)
On the next day, your outstanding balance would be about ((10/100)*1000.27)/365 = $1000.544 and so on!
Don’t forget that your daily payable balance is calculated on a compound interest basis! As a result, you will see a hopping rise in your outstanding balance every month!
So, pay as much as you can afford and reduce your spending in other areas to pay off your debt at the earliest!
It will help you to pay off your outstanding balance amount faster. And moreover, you can save more on your interest payments.
Applying for multiple credit cards at once
Lucrative schemes like a free credit card, reward points, etc. might entice you to opt for another credit card.
You might have heard that opening new credit lines boosts your credit score! Yes, it’s true!
Because if you can manage your credit lines properly, you can have a decent credit utilization ratio.
Don’t forget that credit utilization ratio and new credit lines account for about 30% and 10% of your credit score respectively!
But there is a catch!
Every time you apply for a new credit line, your creditors pull a hard inquiry! These inquiries create an adverse effect on your credit report. In fact, a hard inquiry can reduce your credit score by 5 to 10 points!
Moreover, opting for new credit lines can lower your average account age. And it can affect your credit score to some extent.
So, if you want to apply for a new credit line, it’s advisable to apply for one card at a time. And try to apply for a credit card which has high chances of getting approved.
[Jonathan: The article is written with U.S. perspective so you will have to check how this impact your credit score where you live]
Overlooking the terms and conditions
You will find many credit cards, which offer low APRs, preferably 0% for an introductory period!
Usually, the introductory period varies from 12 to 15 months. After that, you will be charged with regular APRs ranging from about 14% to 27%.
These cards can provide immense financial assistance to you! For example, you can transfer your existing outstanding balances, make large purchases, etc.
So, while opting for such a credit card, read the terms and conditions carefully! And make sure that you are keeping track of when the card’s introductory period ends. Else you might end up paying a hefty amount in interest or fees!
Maxing out credit cards
One of the important things you should know while using your credit card is your credit limit!
Well, a credit limit is the maximum amount which you can charge without paying a penalty. Your creditors decide your credit limit on the basis of your credit score!
But why shouldn’t you max out your credit cards?
Before we proceed, you should know what is the credit utilization ratio?
It is an integral part of your credit score, which comprises 30% of the same! It’s the ratio of your credit card balances to your credit limits.
The higher your credit utilization ratio, the more your credit score gets affected negatively! In fact, if you max out your credit card, your creditors might not allow you to make additional charges.
And if you exceed your credit limit, apart from the over-the-limit fee, you also risk having your interest rate increased to the penalty rate.
In fact, maxing out credit cards makes you vulnerable to the debt trap! However, if you are already overwhelmed with debts, you should pay off debts at the earliest!
You can look for a genuine debt relief company to consolidate credit cards online and repay with ease!
Taking out cash advances
Are you in dire need of fast cash?
Having a credit card might tempt you to step into the nearby ATM and take out cash by swiping your card!
But are you aware of the charges of a cash advance?
Let’s have a look!
Cash advance fees: Taking out a cash advance will levy a cash advance fee on you. This fee can be a minimum flat rate or a percentage of the amount you are taking out.
Usually, the cash advance fees range from about 2% to 5% of the cash advance amount.
ATM fees: Apart from the cash advance fees, you will be charged with an ATM fee too! And this fee varies from $2 to $5 depending on the ATM you are using.
In fact, the ATM operator and your credit card company both can charge an ATM fee!
[Jonathan: This is actually a mistake I did myself : I took 200 EUR from the ATM and got charged 8 EUR, 4% was a pretty hefty fee! Lesson learned and not repeated since :)]
High APRs: The APRs of cash advances are usually higher than the APRs charged for purchases and all. According to a 2017 article in the New York Times, the average APR for a credit card cash advance is 23.68%!
No grace period: Usually, you get a grace period on your credit card. In that span, if you pay off your outstanding balance you don’t need to pay any finance charge.
But cash advances don’t have a grace period! You will see a hopping rise in interest as soon as you swipe your card.
All together with all these above charges, taking out cash advances can burn a hole in your pocket!
However, if you have already taken out a cash advance, pay it off asap! Else you will be trapped with the accrued interests and fees!
So, if you are a novice in using credit cards, refrain yourself from doing these mistakes! And if you are an existing credit card user, you might have found one or more mistakes you have made. [Jonathan: Yes Nelly I did, thanks for reminding me]
Whatsoever, if you are aware of these mistakes, you will be able to manage your credit cards more efficiently!
Author’s Bio: Good Nelly is a financial writer who lives in Milwaukee, Wisconsin. She has started her financial journey long back. Good Nelly has been associated with Debt Consolidation Care Community for a long time. Through her writings, she has helped people overcome their debt problems and has solved personal finance related queries. She has also written for some other websites and blogs. You can follow her Twitter profile.
I would like to thank Nelly once again for this practical article and hope this was helpful to you. If you have a friend currently struggling with credit card payments or making the same mistakes all the time, be a good friend and share the article with him or her!
What has been your experience with credit cards? Have you made some of the mistakes? Are there other common mistakes we forgot to mention? Let us know in the comment below!
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