Credit cards, when used wisely, can be a beneficial way to pay for purchases and even a helpful way to manage your finances. But when they’re abused, they can become money pits. A hole of crippling debt of which escape becomes increasingly difficult the deeper you find yourself. But among some of the ways to properly use a credit card, there are a number of things that should be avoided. These are the 6 most dangerous habits of credit card users:
Paying the minimum balance
What makes this habit so dangerous (other than high interest charges) is how unfortunately common the practice is. Making purchases on your credit card you can’t afford (even in an emergency) leaves you with a balance you can’t pay off in one shot. So when the monthly bill comes, that “minimum payment” starts looking really tempting just so you can keep some cash on hand. But unfortunately, with interest rates sometimes as high as 40% or more, it becomes a trap.
What you should do instead: if you can’t pay off the balance in full each month (which is optimal), pay off as much as you can afford to. Don’t leave a balance on your credit card for too long or you’ll end up paying more in interest than the original purchase before long.
Perhaps the only thing worse than paying the minimum balance is missing a payment or making the payment late. Charges of up to $50 for late payments aren’t unusual. Add that to the high interest rates of credit cards and you’re looking at an expensive mishap.
What you should do instead: Don’t be late. Pay the minimum balance if that’s truly all you can afford in order to be on time, but avoid paying late fees at all cost.
Balance transfers to pay your bill
Credit card companies try to steal your business from other banks by offering low or zero interest on balance transfers. Many times, it’s only a temporary “introductory rate” which increases after the grace period. Some novice credit card users think they can use these offers to “beat the system” and not pay interest through a chain of balance transfers. Not only will this fail to work out the way you think it does, but it can also do irreparable damage to your credit score.
What you should do instead: If you have a balance on your card and are looking for a way to reduce your interest rates temporarily, low rate balance transfer offers can be helpful, but do it sparingly. And also make sure the post-introductory rates are better (or similar) to your old card or you lose in the long-run.
Drawing cash from an ATM machine or during a credit card purchase from your credit account is another common credit card pitfall. Not only are there usually charges from ATM machines as well as your credit card company (commonly known as double-dipping), but the interest rates for cash advances are generally higher as well.
What you should do instead: Get cash elsewhere. Cash advances from credit card accounts should be an last resort for getting cash…next to a payday loan.
Maxing out your card(s)
Believe it or not, maintaining a balance of more than 10% of your available credit on your credit cards can lower your credit score. So maxing out your credit card (or cards, in some cases) can be incredibly damaging to your credit history. Use credit cards sparingly and if you can’t seem to stop your balance from increasing month to month, it’s time to stop using credit cards altogether.
What you should do instead: Try to keep a balance of no more than 10% of your available credit at any given time. If you can’t, perhaps you should cancel your cards until you have the financial responsibility to do so.
Keeping multiple credit card accounts
I know too many people who do this. They have one credit card for “regular purchases” and one for “emergency use only”. I don’t really understand the difference. It’s also common for shoppers to have store branded cards that they only use for stores. Avoid doing either of these if you can. Part of your credit score is calculated on how many active credit accounts you have. So even if you have open accounts for which you never have a balance it could hurt your credit standing. Worse yet, even though you don’t use a card, the terms can change, sometimes charging fees for non-use. Then, when you don’t pay that balance, you get hit with late fees, interest, and a stain on your credit report.
What you should do instead: Consolidate your credit cards to a single account. Keep the card that suits you best: lowest interest rate, highest available balance, best rewards, etc. If you must insist on having multiple cards, manage them diligently even if they aren’t being used regularly.
Using a credit card wisely means knowing what you can and can’t afford. So perhaps the biggest pitfall for credit card users is those who aren’t managing their purchases closely enough. Spending more money than they have. This is the easiest way to end up in a crippling debt situation where you start to consider some of the above poor habits like maxing out a card, paying minimum payments, or balance transfers.
What you should do instead: Watch your purchases closely. Understand the costs of interest and fees associated with maintaining a balance and avoid it all you can. Don’t use your credit card to purchase items you can’t afford and you’ll be just fine.