Five Big Mistakes Even Smart People Make with Credit Cards
During the holiday season it’s easy to overspend, especially with a credit card and amazing bargains you cannot pass up. It happens to even the most financially savvy people. This season, avoid these five blunders.
1. Not having a payback plan —
Because it’s so easy to carry over a balance on a credit card and pay a minimum balance every month, people often pull out their credit cards assuming they’ll just figure out how to pay off the debt as income becomes available.
Instead, remember that credit card transactions are, in essence, loans. If you don’t have the details about where the payback will come from and how long you expect it to take, then you should be your own loan officer, deny your request, and put the card away.
2. Treating credit as “extra” money —
Credit is not extra money. In fact, it often costs money if you have to pay interest. Instead, credit is just the money you promise a lender you’ll have later. That means you are limited by your existing budget, regardless of what your credit limit on the card actually might be.
What a credit card should do for the average person going about daily life is assist with cash flow. For example, if most of your bills are due on the first of the month, you would pay them from your checking account and decide to use your credit card for groceries and commit to paying off the card on your next payday.
3. Not knowing which card to pay off first —
Some gurus advocate paying off cards with small balances first so you get the psychological boost of knowing the accounts are “finished.” But mathematically, you’ll save money and get out of debt faster if you push as much as you can toward the card with the highest interest rate first. Regardless of your method, remember that each time you eliminate a card, take the money you’d allocated for payment and put it toward the card with the next card.
4. Assuming you’ll remember every payment —
Even if you have just one card, life is busy. That’s normal. And pretty soon, it happens–you miss your credit card payment due date and get hit with a late fee. The more cards you have, the harder it is to remember when to pay, too. At the absolute minimum, set yourself a reminder on your smart phone, calendar, or online banking account alerts to alert you about your upcoming payment due date. Use Electronic Bill Pay and iPay QuickPay to simplify the task and schedule payments in advance, so you don’t forget.
5. Handling opening and closing of accounts poorly —
Every time you open a new credit card account, you should ask yourself how it would affect your debt-to-income ratio if you maxed out your credit lines.
Try not to open a bunch of new accounts in a short time frame, as creditors can wonder why you need so much credit all of a sudden. If you already have accounts, don’t let any sit idle; make occasional purchases to keep them active. If you must close an account, try to keep ones that have the longest history for you & would best show long-term evidence of spending & the ability to pay.
This article was brought to you in part by Balance, our financial education partner.