8 Bad Mistakes When Dealing With Credit Cards

Credit cards offer a high level of convenience, but they can also get you into some serious financial trouble. One issue with credit cards is that many people do not understand all of the complexities of how they work. Another concern with these financial tools is that credit cards are often issued to young adults who are not financially literate. High schools and colleges do not include basic financial management as a part of their curricula. Be sure to avoid these eight bad mistakes with your credit cards.

1. Using Credit for Living Expenses

Using credit cards for your basic living expenses is a big mistake. Putting your week’s groceries, gasoline or electricity bill on your credit card could result in you incurring fees and interest. You could be paying for those groceries or that gas tank fill-up years from now. If you are between jobs, laid off or can’t make ends meet until the next paycheck arrives, consider a lifestyle change.

2. Only Paying the Minimum Amount Due

When you only pay the minimum amount due on your credit card bill, you are racking up high financing charges. Paying the minimum barely makes a dent in the principal of your debt. Each of your payments is mostly interest. You could end up paying thousands of dollars in interest on a relatively small principal of debt. If you continue using the card and adding to the principal of your debt, you may never see a zero balance.

3. Paying Your Bill One Day Late

If your payment was due at 11:59 pm on the last day of the month, and you pay it at 12:01 am on the first of the month, it is late. That late payment incurs penalties and fees. Late payments are also reported to all of the major credit bureaus. This could result in a ding on your credit score, which could affect your credit for months or years to come.

4. Not Prioritizing Payments Based on Interest Rates

When you have multiple debts, it is in your best financial interest to pay off the debt with the highest interest rate first. For example, if you have balances on three credit cards and they have interest rates of 10, 12 and 14 percent, pay off the one with the 14 percent interest rate first. Then pay off the one with the 12 percent interest rate. Most credit cards have higher interest rates than student loans, mortgages and car loans.

5. Opening Too Many Lines of Credit

Stores reel you in by offering an initial reward when you open a credit account. Opening too many lines of credit sets you up for major debt. Try to limit yourself and avoid store credit cards altogether. The flexibility of one major credit card may serve you better.

6. Maintaining a High Credit Utilization

Another aspect of credit and your credit score is your credit utilization rate. If you have a line of credit for $10,000 and you have a balance of $8,000 on it, that is a high utilization rate. Try to keep your credit utilization rate to 30 percent or less of your available credit.

7. Canceling a Paid-off Credit Card

If you have balances on multiple cards but pay one of those cards off, closing the paid-off account could damage your credit. Your credit score is partially based on your debt to available credit ratio. When you close off a line of credit, you have a higher debt to available credit ratio. Consider keeping the account open with a zero balance until you can pay down one or more of your other cards.

8. Getting a Cash Advance from Your Credit Card

Many people recognize that payday loan services are financially destructive. However, taking a cash advance from your credit card could be equally or even more damaging to your finances. With a cash advance, you pay a flat fee or a percentage-based transaction fee to get the cash. Unlike when you use your credit card to charge products or services, a cash advance begins to incur interest charges immediately. The interest rate for cash advances is usually higher than the interest rate for purchases.

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About the author: Wifred Murray

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