Credit cards can be risky, especially for people who have never used them before. New credit card users may be tempted by the idea of "free" money. Some people who have used credit cards before still get caught in credit card traps.
If you're thinking about getting a credit card or trying to decide whether or not to keep yours, knowing the risks can help you develop better credit card habits. There are ways to use credit cards in a smart way and stay out of the traps that so many people fall into every day.
The Temptation to Spend Too Much
Studies show that when people pay with credit cards instead of cash, they spend more. In one study, people who used credit cards were willing to spend twice as much. When you use a credit card, it's easy and quick to spend money, and you don't feel the "pain" of cash leaving your wallet. It could also explain why the number of people with credit card debt is going up in the U.S.
Set a personal spending limit on your credit card based on how much you can afford to pay on it each month, even if it's less than your credit limit. Be careful not to spend more than you can afford on things or to live a lifestyle you can't really afford.
Interest makes paying off the balance harder.
If you pay off your credit card balance in full every month, you won't have to pay any interest. If you don't pay off your balance in full with each payment, some of your money goes toward paying interest. This makes it take longer to pay off your balance.
How to avoid it: Pay off your balance in full to avoid paying interest on purchases. If you can't pay the full amount, you might be charging more than you can pay. Try to pay as much as you can each month until the balance is paid off.
Possible to get into debt
When you borrow money, you add to your debt. The more you borrow and don't pay back, the more debt you get into. Debt causes a lot of other problems, and not just financial ones. It can cause stress, depression, and other health problems that can be very bad.
Once you have debt, it is much harder to reach your other financial goals. When you pay off debt, you have less money for other things, like saving for retirement or a summer trip. If you need to pay your bills, you might have to put off school or feel stuck in a job you don't like.
How to avoid it: If you can't pay off your balance in full every month, that's a sign you're going to get into credit card debt. Stop using credit cards and try to live on what you can afford so you don't get in over your head.
You could hurt your credit score.
Your credit score changes a lot because of credit cards. If you use your credit card well, your credit score will go up, but if you make a mistake, like missing a payment for 30 days or more, your score will go down. Your credit score will drop the more mistakes you make.
How to avoid it: The best way to build and protect your credit score is to pay your credit card bill on time, keep your balance below 30% of your credit limit, and apply for credit cards as little as possible.
Minimum payments can give a false sense of security.
Your credit card company only needs you to pay a small amount each month to keep your account in good standing and avoid late fees. Minimum payments are the worst way to pay off your balance, and the only thing worse is not making any payments at all. If you only make the minimum payment, it will take you longer to pay off your balance and cost you more in interest.
How to avoid it: It's best to pay off your balance in full, but if you can't, pay more than the minimum payment to get rid of your balance faster and pay less interest overall.
Credit Card Terms That Make No Sense
Even though the Credit CARD Act of 2009 made credit card terms a lot clearer, there is still a lot of confusion about credit card offers. There can be more than one interest rate on a single credit card, and it can be hard to figure out which one applies. If you don't understand the terms of your credit card, it could hurt your credit or cost you more money in fees or interest rates.
How to avoid it: Learn about the different types of credit card balances and the interest rates that apply to each. Read the details of your rewards program to find out what kinds of purchases earn you points. If you have questions about your credit card, call the customer service number on the back.
It's hard to keep track of spending on several credit cards.
Tracking your spending is important for a healthy financial life, but using credit cards can make it harder to keep track of all your spending, especially if you use credit cards along with cash and debit cards and if you use more than one credit card. That's one reason why credit cards make it so easy to spend more than you have.
How to avoid it: If you use more cards, you'll have to look in different places to keep track of your spending. You can keep track of them by hand in a spending journal or spreadsheet, or you can use software like Mint or Quicken to help you.
There is a chance of credit card fraud when you use a credit card.
Credit card fraud is something that could happen to anyone who has a credit card. Your credit card can be stolen, or your credit card information can be stolen from a store where you've shopped. Your liability for fraudulent credit card purchases is limited, but you need to report these charges quickly.
How to avoid it: Keep an eye on your credit card and report any lost cards or strange charges right away.
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