The 7 Deadly Sins of Credit Card Debt and How to Manage It
Every convenience you enjoy comes at a cost. It is no different with credit cards. In fact, they can be dangerous when used recklessly. Often times, you incur charges on your credit card that are higher than they ought to be. This is usually down to simple mistakes with steep consequences.
With this in mind, we have compiled a list of the 7 pitfalls of credit card debt you should steer clear of to keep you on a sturdy financial footing.
- Advertised Rate
Many credit card issuers only provide a range of rates instead of giving a single interest rate. The difference between the base and the maximum rate can be as much as 10%. It’s no surprise that credit card issuers advertise their cards based on the lowest rate while in reality charge you based on your credit standing. This can cost you a small fortune if not well managed.
Lesson: Before you sign up for a credit card make sure you’re aware of the actual interest rate you’re going be charged.
- The Rewards Trap
We all love free stuff, but sometimes there’s more to it than meets the eye. Credit cards usually come with a ton of rewards such as cash back and merchandise credits. The psychological appeal of such rewards is often a red herring. Rewards cards normally carry higher interest rates. Even worse, you might be tempted to take out more cards and incur more debt in pursuit of bonuses.
Lesson: Pay close attention to the extra charges you’re incurring as a result of rewards programs when paying interest on your credit cards. You might just be paying 3% more for a 1% cash back.
If you’re like most people, you only read what you want to and not what you need to. For this reason, you’re likely going to miss out on the fine print when signing up for a credit card. Most companies reserve the right to change their rate strategies at their discretion. This means that a card you initially felt was a great deal can end up costing you more than you’d bargained for later. They’re duty bound to send you a notice, but many people hardly take time to go through the ‘bank jargon’.
Lesson: Don’t get complacent. Comb through your credit card statements at least once a year to make sure everything is in order.
- Making Payments
This is a no-brainer. Nonetheless, many people get caught up in the trap of missing credit card payments. Missing a payment will cost you up to $35 in fees, and you’ll also pay an interest on the balance. Worse yet, it will have an impact on your credit score if you’re 30 days late.
Lesson: Set up an automatic payment from your checking account to keep your payments up to date.
- Credit Record Changes
After you’ve taken out a credit card, it is possible for your credit rating to change. If it changes for the worse, then the credit card company can revise your rates upwards.
Lesson: Keep your credit rating squeaky clean and monitor your interest rates to spot any changes in good time.
- Cash Advance
Many credit card issuers allow customers to take a cash advance against their line of credit. This is risky because you’re charged for this service and pay interest on the advance as well. The rates for the advance are usually higher than other credit options.
Lesson: Avoid cash advances.
- Poor Prioritizing
There’s nothing wrong with carrying multiple cards, but it can be a problem if you don’t understand the financial ramifications of each card. Understanding the interest charges incurred on each card allows you to use the cheapest one at your disposal at any one time.
Lesson: Always prioritize your cards starting with the ones with the lowest interest.