If you’ve ever flown for free after collecting thousands of miles, or secured a loan thanks to excellent credit, you know firsthand that wisely wielding a credit card can work in your favor.
But while the advantages of credit card use are numerous, misusing your card(s) can lead to serious financial straits. It’s much easier to swipe your card and to spend excessively than to deal with debt, so make sure that you raise your credit-card-consciousness before you step out the door. Avoiding a few common mistakes will help to keep your credit in the clear.
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Here’s a list of what NOT to do with your credit card:
1. Live Above Your Means
Living above your means is perhaps the easiest and most dangerous way to use a credit card. Never fool yourself into viewing credit as free money. The repercussions for overspending with a credit card are conveniently delayed, but seriously detrimental to your long-term financial health.
Your credit card usage should be determined by your intimate knowledge of your personal finances and your own customized budget, not by any maximum credit limit or a desire to live more extravagantly than your paycheck allows for. Keep a financially realistic frame of mind, even when you know that you could walk away with a pricey purchase.
2. Use Your Card to Budget Retroactively
Having a budget is one of the most important parts of wisely managing your money. And while a credit card may keep track of all of your purchases, especially with improved online account management, don’t rely on the statement to piece together your budget after the money’s already been spent.
Create a budget beforehand, and let that budget dictate when and where you swipe your credit card. Some credit card companies even allow you to categorize your spending on your online account, which could assist in keeping track of how much you’ve spent in certain budget categories.
3. Pay Your Bill Late
Human error can overrun even the best intentions (as Liberty Mutual emphasizes in their “Humans” campaign featuring spilled ketchup and felled air conditioning units). Even if you plan to pay your bill on time each month, forgetfulness or delayed processing can impede a timely payment and increase your risk of fees and high interest rates.
Setting up an automatic payment for your credit cards is a simple way to ensure that your bills are paid on time.
4. Assume That Your Bill Is Correct
On the topic of human error, it isn’t unfathomable that your credit card company, or a store where you’ve made a purchase, charged your card incorrectly. It can be tedious, but it’s important to check your credit card statement—whether online or on paper—each month to make sure that the transactions are correct.
Checking your monthly statements also helps you to pick out recurring charges for services or products that can be avoided in the future, like credit card fees at certain ATMs or automatically renewed subscriptions.
5. Make the Minimum Payment Every Month
Most credit card companies give customers the option to make a minimum payment on their account rather than paying the balance in full each month. Paying the minimum amount, even though the option exists, still leads to high interests and debts down the road.
Ensure that you can pay off your total balance each month by avoiding overspending and keeping adequate funds on hand to allocate to your credit card bill. Credit card debt is the third largest source of debt in the United States, a statistic you can avoid by clearing the balance completely with each payment.
6. Frequently Open and/or Close Credit Card Accounts
With so many credit card companies offering various credit card rewards, it’s tempting (and easy) to open up new card accounts to reap the benefits. Be careful, however, as having a surplus of credit cards can hurt your credit, as well as your fiscal organization.
On the reverse side, if you’ve paid off a debt and you’re eager to do away with the accompanying credit card, it may be wise to hold off. Canceling accounts right away can increase your debt to available credit ratio. Keep the account while your credit score recovers, but leave the plastic at home to impede spending beyond your means.
Having a good credit score leads to further financial benefits, like less expensive car insurance and improved ability to get a loan. Steer clear of credit card misuse to stay on track to your financial goals and to long-term financial security.