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Using credit cards unwisely can have lasting repercussions on your money situation. From choosing the wrong card to failing to pay on time, even minor mistakes can lead to hefty interest charges and debt buildup. But you can steer clear of these pitfalls with some discipline and know-how.
Read on to uncover the five most common credit card pitfalls people face and how to avoid them. By adopting some better practices, you can reap the rewards of credit cards without falling into any expensive traps.
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1. Choosing the Wrong Credit Card for Your Needs
Selecting the most appropriate credit card from many options can be daunting, given the diverse range of fees, interest rates, and rewards offered by each. Selecting a card that could be more optimal may result in missed opportunities for lucrative rewards or paying excessive interest charges. Therefore, careful consideration is imperative to ensure that the selected credit card aligns with one's financial goals while balancing costs and benefits.
Consider your budget, spending habits, credit score, and money goals when applying for a new card. A rewards card only makes sense if you can pay off the balance every month. If you carry debt month-to-month, look for cards with 0% intro APRs on purchases and balance transfers. Read the fine print, too – a killer signup bonus may have some strings attached. Take your time and find a card that fits your lifestyle.
2. Missing Payments of Credit Card Bills
Late payments on your credit card can have serious consequences for your finances, such as penalties and a negative impact on your credit score. To avoid this, you can set up automatic payments and add payment due dates to your calendar with reminders to ensure you pay on time. Being proactive and taking these steps can help you avoid any neglect and maintain a healthy credit profile.
If you encounter an unexpected expense and miss a payment on your credit card, it's important to inform your card company immediately. They may be willing to waive the fee, particularly if it's your first time doing so. If you're unable to afford the minimum payments on your credit card, consider reaching out to a credit counselling service for assistance. Late payments can negatively impact your credit score, so it's crucial to pay your credit card bills on time.
3. Making Only Minimum Payments
It may be pleasing to settle for the minimum monthly payment, especially if you have a large balance. However, this can be a costly mistake. Most of your payment will likely go towards paying interest fees, leaving only a small portion to reduce the principal amount. As a result, you'll prolong your debt repayment and pay more in total interest. To avoid this, paying more than the minimum amount whenever possible is best.
If you have a balance of less than Rs 1,00,000, it is recommended that you make fixed payments that are large enough to pay off your debt within a year. However, if you owe a larger amount, you can set up a payment plan where you pay a fixed amount that covers both the interest and principal until you become debt-free. To save money, it is advisable to pay more than the minimum payment whenever it is possible. Hence, it will help reduce the high-rate balances more quickly.
4. Taking Cash Advances and Spending on Unnecessary Things
While it may seem convenient to turn to credit card cash advances during a financial emergency, the high fees and interest rates that come with them make them an unwise choice. Interest rates on cash advances are typically much higher than those for regular purchases.
In addition to that, cash advance fees are charged either as a flat rate or as a percentage of the withdrawal amount. It's best to avoid relying on credit card cash advances and explore alternative options instead.
When you make a cash advance, unlike regular purchases, you do not get an interest-free grace period, as this means that you start accruing interest immediately. As a result, the additional costs quickly add up, and small cash withdrawals can turn into large balances that become difficult to repay. Therefore, it is better to use this expensive feature only for absolute necessities.
5. Overspending Using Your Credit Card
Using a credit card to make purchases can be tempting, especially with easy tap-and-go payment methods that don't require signing or entering a PIN. However, giving in to impulsive purchases and unnecessary spending can make paying off your credit card balance more difficult, leading to increasing debt and interest fees.
To avoid excessive credit spending, establishing a budget and remaining committed to it is advisable. Consistently monitoring credit card statements can aid in detecting extra charges on time. While it may be tempting to utilise credit for all expenses, it is recommended that cash or debit be used for more flexible expenditures, with credit reserved solely for planned, essential purchases. By adopting an awareness of credit card spending habits, it is possible to prevent balances from escalating and causing financial strain.
Conclusion
Mishandling credit cards jeopardises your financial health. While rewarding when managed prudently, common mistakes can trap you in endless debt. Choosing suitable cards, paying responsibly, avoiding cash advances, and controlling spending prevent credit card pitfalls. Use your cards judiciously as financial tools, not expensive liabilities. Employ smart strategies and reap the advantages credit cards offer without the added baggage debt brings. Your future self will thank you.
