Credit cards have a divisive reputation in the world of personal finance. Some people see them as a way to have more spending freedom or as a lifeline. Others see them as evil traps to throw you into debt.
The truth is somewhere in the middle. Credit cards are necessary for your financial future because they’re a crucial way to build your credit. However, a credit card holder can get into more debt than they realize if they don’t know how to use their cards right.
That last part is key: it’s all about knowing how to use them. If you’re new to the world of paying with plastic, steer clear of these common mistakes.
Common Mistakes for a New Credit Card Holder to Avoid
Credit cards seem simple: the credit card company pays the retailer and you pay them back. It’s the underlying details like interest and rewards that get people into trouble, though. Educate yourself on these common mistakes to avoid.
1. Choosing the Wrong Credit Card
Your first hurdle as a credit card holder is figuring out which credit card to get. They all have different credit requirements, reward offerings, interest rates, and more.
It’s tempting to apply for the first card offer that comes in the mail and call it a day. Do you really know what you’re signing up for, though? It’s important to do some research first. Look for resources like this website where you can compare credit cards based on your needs.
2. Ignoring Interest Rates
It’s easy to get dazzled by rewards like cash back for your credit cards, but it’s easy to forget how interest rates factor in.
For instance, let’s say your credit card has a 5% cash back offer. You think, “That’s great! If I buy this $100 item, I’ll get $5 back.”
Then you only pay $20 per month toward that $100 balance with a 25% interest rate. By the time you pay it off, you’ve paid $6 in interest, so you lost money while trying to save money.
3. Missing Payments
Sometimes the problem with credit cards isn’t buying items you can’t afford. You may have plenty of money to pay off your balance, but you just forget to pay it because life gets busy.
In the world of credit cards, that’s a pricey mistake. The best case scenario is that you pay a late payment fee, which is usually $30 or more.
If you’re more than 30 days late, on the other hand, you have more problems on your hand. This is often when credit card companies report the missed payment to credit bureaus.
Those missed payments will take a bite out of your credit score for years after you’ve paid them off.
4. Making Minimum Payments
A common misconception is that if you can afford the minimum payments, you can afford a purchase. In truth, those minimum payments are designed to keep you in debt for as long as possible. After all, that’s how the credit card company makes money.
Instead, set your own budget and always pay more than the minimum payment. Give yourself an affordable spending limit each month. With today’s online banking options, it’s easy to track and manage your spending.
Making Credit Cards Assets, Not Risks
When you’re building something, a hammer is an essential tool. If you misuse it, though, it becomes a hazard because you could smash your thumb or damage your project. Credit cards are the same way: they’re only dangerous if you misuse them.
Avoiding the credit card holder mistakes above can make sure your cards help you, not hurt you. For more great financial tips, check out our money blog.