There are basically two ways to live financially, first is saving your income and investing it over time to ensure your financial freedom which is not bad at all. Now the second way to live financially is to use credit as money and use the debt to get assets and leverage you way towards your financial freedom. The most widely used credit instrument today is none other than the lifeline of youth and safety net for the elderly and that is credit cards. If used properly credit cards can benefit in many ways which includes an amazing credit score, rewards and benefits, access to better deals for mortgages and personal loans. However improper use of credit cards can land you in issues like debt with higher interest rates, low credit scores, penalties, financial stress etc.
Knowledge and awareness about credit card mistakes to avoid can help the customers in informative decision making about their expenses and help them in improving their credit scores. Hence this information about major credit card mistakes can not only save customers from making terrible financial decisions but will also help in utilizing the complete potential of credit available to them. Let us do a qualitative analysis to find solutions for these major credit card mistakes that customers must avoid.
1. Not Understanding Your Terms and Conditions
Out of all major credit card mistakes this mistake is the most frequent and a majority of customers suffers just because of ignorance and laziness to not read the terms and the conditions of their credit cards. People who do not go through the terms and conditions properly are the ones who gets unpleasant surprises down the road with their credit cards.
Solution:
Using your credit card means taking credit from the credit card provider. It is simple common sense to go through the terms and conditions before taking debt from anyone. You must have the complete information about interest rate, credit card annual membership fee, rewards and repayment terms. Just by being proactive and aware this major credit card mistake can be easily avoided.
2. Only Making Minimum Payments
People think that making a minimum due each month will reduce the credit card balance and will save them from accruing interest each month, but minimum amount due us required just to prevent the account from going in the past due status. If we look closely, we can easily find out that the minimum due is roughly 1.5 percent of the balance plus any past dues and interest charges. By paying the minimum amount due you will make the payment for 1.5 percent of the amount used but your remaining balance will start accruing interest on the average rolling balance daily. It is one of the major credit card mistakes that people do just because of the incomplete understanding of the minimum balance and mechanism of accrual of interest each month.
Solution:
This reason behind this mistake is basically lack of knowledge of how the minimum payments work in favour of the banks and not for the customers. Making payments in full every month before the due date should be the idea approach for repaying the balance. However, if you do not have the funds available for the complete payment of balance before the due date try make as much as you can above the minimum payment due. This is how you can avoid making this major mistake with credit cards.
3. Missing Payments
Missing your payments means that you are not even able to make the minimum payment due on time. It reduces your credit score and impacts your credibility as a customer for credit. In addition to lowering your credit score it will impact the interest rates on your purchases and you will have past dues which will accrue interest as well. This credit card mistake to avoid is actually a fatal one considering the impacts it will have on your account.
Solution:
This problem can be resolved with the help of automated reminders. You can simply add the due date on the google calendar app so that you are reminded on your smart phone for the upcoming payment in advance. It would be even better to get the automatic payment feature activated for the minimum payments to make sure that you do not miss on the payments.
4. Out Your Credit Limit
This mistake is more likely a discipline issue or mishandling the credit limit assigned to you. More than 80 percent customers do not know the impact of maxing out their credit limit. Utilizing the entire credit limit or the amount close to the maximum limit cam impact credit score and will make it tough to get credit in future. This major credit card mistake is directly linked to the credit utilization ratio which is a critical factor in determining the credit score.
Solution:
This credit card mistake can be avoided by actually not being a shopaholic and exercising discipline on your expenditure. Keeping a low credit utilization ratio will not only help in maintaining a good credit score but will also help is getting benefits and offers from the credit card provider. The advised value is 30 percent of your credit utilization ratio, however keeping the utilization close to 10 percent can really help in getting credit benefits from the credit card provider.
5. Using Credit for Everyday Expenses
Using credit card for groceries can be the best utilization of the credit card as it also gives the reward points for most of the credit cards. But using the credit card as the only source for daily expenses can land you in trouble because the money you are spending accrues interest on daily basis for the number of days it will be rolling over after the due date. Its better to shop once or twice in a month for groceries to keep the spending in check. This credit card mistake to avoid can really slip through if not monitored properly.
Solution:
The golden rule to financial management is to use credit to create assets and use income to cover up the expenses. However, if you use credit card for groceries and shop for once or twice in a month and pay the balance before the due date you will not only be increasing the credit score but will also end up gaining reward points which can be redeemed later. This credit card mistake can be avoided by creating a budget and paying the balance before due date every month.
6. Taking Out Cash Advances
Using your credit card for cash advances typically comes with high fees and immediate interest charges.
This is the most critical credit card mistake to avoid as the cash advances are usually in the maximum interest rate slab for almost every bank. The interest is charged right from the moment you take out cash and cash advances also have a cash advance fees which can be up to 10 percent of the transaction amount. So, it would be wise to use the credit card for your purchases only as taking cash out of your card is an expensive deal for you.
Solution:
You would be just surprised to know how much it can cost you if you do not have the information about taking cash advance because the charges under cash advance are almost equally charged as your penalty priced transactions. The transaction fee does the job of salt on the injury as transaction fees can be up to 10 percent of the amount transacted. Personal loans are always a better alternative in emergencies as compared to the cash advance. However, it is always beneficial to make a budget and save some money for emergencies. This major credit card mistake can be avoided by effective budgeting and definitely with the common sense to have a backup for emergencies.
Credit cards are just like your best friend to help you with financial issues if used properly, however if not used properly they can be your worst enemy as they can put you in substantial debt with high interest rates and can impact your credit score badly. By having the awareness and knowledge about the major credit card mistakes to avoid you can actually use the credit cards to their full potential and unlock your financial potential by improving your credit score.
