Common Credit Card Mistakes
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By :
Amanda Brown
Submitted
2009-12-06 12:53:05 |
If you carry credit cards, you know how convenient they are to use. If used properly, credit cards offer significant safety and convenience benefits, but mistakes with your credit can cost you dearly. Even small mistakes can end up being very expensive in long term by ruining your credit rating. We reviewed some of the most common mistakes and this articles highlights the most common credit card mistakes an how to avoid them.
Taking up New Debt to Pay off Old Debt
This is one of the most common issue with people in debt. People maxed out one card and then get a nice balance transfer offer from their second credit card. What they do next? Well, you guessed it right. They transfer balances from the first card and now it is ready to be used again. While they feast on their first credit card, second card start to accumulate interests and eventually jumps to default rates that are as high as 29.99%. End result - you did not get rid off your old debt but accumulated some new debt on your way. Due to this exact same reason, it is strongly suggested that you never transfer balances from one card to another unless you have a proper plan to pay off your balances and commit to not use the old card. The first promise you need to make to yourself is: "I will not incur any new debt"; i.e. no more credit card charges and no new loans. Further, never ever take money out of your home(home equity) or retirement plan to pay off credit card debt; You will usually end up worse off than when you started. Remember, credit card debt is unsecured debt and can be wiped out if you file for bankruptcy but any loan against your home is secured by your home itself and could easily cost you your primary residence.
Only Making Minimum Monthly Payments
If you want to be in debt forever, make minimum monthly payments on your credit cards. These payment are designed to give banks an enormous payoff, while keeping you shackled to debt for decades. Remember, interest on credit card balance is compounded on a monthly basis and minimum payment is only designed to cover monthly interest not a single penny from the principal. Credit card minimum payments may seem convenient on the surface, but only making the minimum payment each month can be quite costly and, it can take you several years to finally get your credit card paid off.
Here is an example:
Total Credit card balance : $10,000
Interest Rate: 24% = 2% monthly
Minimum monthly payment: $300
So if you have a $10,000.00 balance on a credit card with a 24.000% APR. If your minimum payment is $300.00 and that is all you pay each month, it will take you 27 year(s) and 1 month(s) to finally get that card paid off (assuming you don't add anymore debt to the balance). You will have also paid $12,466.09 in interest alone.
If you send a fixed $300.00 payment, on the other hand, this extra money will make it possible for you to pay off that same balance in just 4 year(s) and 8 month(s) - that is 22 year(s) and 5 month(s) sooner than if you paid just the minimum payment. You will also only pay $6,643.43 in interest, saving you $12,466.09.
Did this calculation shocked you? Whether you believe it or not, that's the truth. If you're looking to run some calculations on your own, check out this Credit Card Calculator
Failure to Understanding The Big Picture
Your financial life depends on your fiscal behavior. You can't just forget about one credit card with balances and keep making payments on others thinking that it will go away. Credit card companies spy on your credit, so always pay every single bill on time. A missing payment here and there can trigger higher rates across the board and that could get you in lot more trouble. So make sure you understand the due date on each account and if they are spread across the month, you can call and request your lenders to make changes so that your payment dates are more aligned to your liking and convenience. If you have a spending problem, setting up a budget might do the trick for you. Remember, setting a budget is easy part but sticking to it is often the most difficult part. Set saving goals for yourself and get your family involved. You want to make sure you teach good fiscal discipline to your children so that they don't get in financial trouble like you did. Don't charge your credit cards close to the limit as it would drop your credit score and a low score would cost you on every single loan that you apply for.
Convenience/Cash Advance Checks
Cash advance checks are the reason why most people got in credit card debt. Remember, cash advance checks offer you a freedom to do whatever you want to do with the money. You can deposit it in your bank account and it is just like extra cash waiting for you. However, very few people realize that there are so many terms and conditions that apply to these checks. First of all, they are treated as cash advances and thus you pay the APR that applies to cash advances as per your card member agreement. This APR is as much as twice the purchase APR in most cases. There is also a transaction fee that could cost of as much as 5% on the balance up front and there is a minimum amount( usually $90) that applies. For example, if you use a cash advance check for $200 with a cash advance fee of 3%, technically you should only pay $6 as cash advance fee. However, in reality this amount will end up at least $30 or $40 due to that minimum amount clause that we just pointed out. So if you paid $30 up front on a $200 cash advance, that's 15% interest up front and you haven't even gotten your money yet. Believe it or not, in certain cases, cash advance checks are worst than your local payday loan place.
Further, a convenience check may be tied to a credit card account, but it does not give you the same kinds of consumer protections as a credit card. If you purchase unsatisfactory merchandise with a credit card, you can request a charge back from your card issuer and the charge will be removed from your bill. If a product purchased with a convenience check is defective or you don't like it, your bank won't be able to help. As you can see, a convenience check is one of the worst financial decisions that you can make, but for some reasons, if you have to use it, make sure to pay off the balance as soon as possible. Only use a convenience check when you absolutely have to.
Remember, average American carries about $6,000 in credit card debt and with a typical interest rate of 15 percent, it would take 41 years to pay that off, assuming the card-holder makes only the minimum payment($100) and doesn't charge any new purchases. Worse, that person will have also paid $10,272.35 in interest alone. You could do so much with this extra money. You can pay for your children college education, you can fund your retirement or even use it for a great vacation for your family. Simply put, that money that could go toward so many bigger and better things.
If you want to be financially successful, controlling credit card debt and putting together a solid plan to pay it off is the most important thing you should do. If you have credit card debt that you can't pay off, you have a spending problem and first thing you need to do is to be honest and admit your problem. Remember, you can't address a problem if you don't even acknowledge that it exists. There is no reason to feel guilty, everyone makes mistakes but those who fix them quickly and learn valuable lessons from their mistakes are the ones who usually achieve success and financial freedom in life.
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Author Resource:-
Author Resource:- Amanda Brown is a staff writer for Fiscalwealth.com. She has published numerous articles on personal finance topics such as retirement, debt management, investment planning and budget planning. You can reach her at amanda.brown@fiscalwealth.com
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Article From Fiscalwealth | Personal Finances, Investment and Wealth Management
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