It came in the mail and you just had to stare at it for a while. Your first real credit card. Not a debit card or one of those pre-paid or deposit-secured cards. The real thing. Shiny, new and ready for a real swiping.
Transunion, the credit reporting agency, estimates that the average person carries about $5,000 in credit card debt. That’s a big number, but it is easy to fall in a deep, dark financial hole if you’re not careful.
Sure, a credit card can be convenient, useful for emergencies, can help build your credit rating — and who doesn’t love those rewards points? But if you’re not careful, you’ll fall into a debt trap that’s hard to climb out of. Here are some of the biggest blunders to avoid.
Taking Out a “Cash Advance”
Oh, the siren song of easy cash. This is one is easy to fall for. You’re a little short and payday is far away. All you have to do is go to the ATM and draw a cash advance from your credit card. Sorry, you just got bit. Not only are the interest rates on advances usually much higher than those on purchases, many cards charge an additional fee of 2 to 5% on advances. And minimum payments are usually applied to purchase balances with lower interest rates first, meaning the high-interest levied on your cash advance will continue to swell. Only payments made over the minimum amount due are applied to the highest interest-rate debts.
Say you take out a $500 cash advance and have no other merchandise purchases on your card. If you pay just the minimum due and are charged 18% interest, it will take you three years to pay the advance off, according to the Federal Reserve System’s credit card repayment calculator. And that’s not counting the additional fees that were tacked on to your advance.
Putting Big Purchases on Your Card
The quickest way to get stuck in the slimy sinkhole of debt is to charge large purchases. It is one of the hardest temptations to resist. An airline ticket home, a new Apple Watch, the latest smartphone. Spend a few hundred here and a few hundred there and soon you’ll max out your card. Then, when you really need it, for an emergency or something really important, you’ll have no buying power.
Here is a secret rarely revealed. Visa, the giant credit card company, reviewed 100,000 restaurant transactions to see if customers who paid with credit cards spent more than those who paid in cash. The research showed that diners paying with credit cards did indeed spend an average of 30% more than the cash customers. And a study of 1,000 adults by GFK Roper Public Affairs and Media found that more than a third of respondents admitted that they used their credit cards for purchases that they couldn’t otherwise afford.
And finally, a 2012 report published in the Journal of Consumer Research shows that when we pay with a credit card rather than cash, we think more about a product’s benefits rather than its cost. We actually over-spend as a result of the payment method we choose.
Now, we’re not saying that you need to carry a giant wad of cash everywhere you go, but consider pulling out that charge card (like an American Express) rather than a credit card when you’re tempted to make a larger purchase. That way, you’ll have to pay off the balance at the end of the month — guaranteeing you’ll think twice about the cost.
Not Paying on Time
The biggest blunder of all is also the most obvious: not making a payment on time. A late payment can cost you rewards points, a late fee, and a hit to your credit score. And late payments can linger on your credit report for up to seven years. That’s a long-time to be in the penalty box. It can also mean you may forfeit any special interest-rate offers, like 0% APR incentives.
How late is late? According to FICO, the most widely recognized credit score company, not all creditors will report you for payments overdue by 30 days. Some hold off until the payment is past due by as much as 60 days. But it also depends on your payment history. If you’ve been a reliable payer for quite some time, the credit card company may cut you a little slack for a one-time glitch. However, if you make late payments a habit, their patience will run thin. FICO says that a single 30-day late payment can drop your credit score from 60 to 110 points. This chart can show you the impact of late payments on various credit scores. It’s a real eye-opener.
Be diligent in making on-time payments by using monthly smartphone reminders, or with money management software or apps. Or set-up a monthly draft to automatically pay your credit card.
Not Calling Your Credit Company to Ask for a Better Deal
If you want a better interest rate on your card, you’ve gotta ask. Think you’re too shy to give it a go? If you are working to pay off a balance and have a decent payment record, you’ve got to make the call. There’s nothing to lose.
Gather up your latest statement, maybe grab an offer or two from competing card companies you’ve received in the mail and pick up the phone.
Signing up for a Retail Credit Card on the Spot
Getting a store-branded credit card can be OK when you’re just starting out and trying to build a credit rating, but signing up for one in the heat of a spur-of-the-moment shopping spree can be disastrous. Oh sure, they’ll try to lure you with instant discounts “if you sign up now” but that meager 10% discount is going to seem really chintzy when you get spanked with a high interest rate on your monthly balance.
Plus, having too many credit cards and credit inquires can sink your credit score. You’ve got a good credit card or two, that’s all you need. Anything else is just another pesky bill to pay.
Pay with Plastic but Don’t Get Drastic
Having the freedom and flexibility of a credit card can be blessing — or a curse. With the right attitude and discipline it can be a boon to your credit reputation and your lifestyle. But rapidly sinking into drastic debt can crash and burn your credit score. Steer clear of the blunders noted here and avoid the unhappy ending of too much credit card spending.