Have Your First Credit Card? Watch Out For These!
This is something I’ve wanted to write about for a while. Learning to budget & save money is huge for people coming out of college, and people seem to understand that. However, they don’t seem to understand how to use a credit card. There’s more to it than just swiping it!
I’ve heard so many misconceptions about how credit works. If you are new to this, read my article on credit and come back! Click HERE.
Someone once told me they thought credit card companies would like them more if they didn’t pay their bills. They assumed their credit would go up because their credit card issuer would be happy to receive more interest money. My head popped off my body. It took a while to put it back on.
Now that’s an extreme, but there are plenty of pitfalls when it comes to using a credit card. Here are the top five.
(1) Only Making The Minimum Payment
You making the minimum payment is a credit issuers dream come true. The longer you delay paying off a balance, the more it accumulates and the more interest they can make off you. The interest rate on credit cards is extremely high. No matter what card you go with. An example of how much more you can pay in interest comes from CreditCards.com.
You have a $5,000 balance on a card with a 14 percent APR, and your card issuer’s minimum payment formula calls for you pay 1 percent of the principal plus interest charges monthly. If you pay only the minimum, you’ll end up paying another $5,000 in interest and take nearly 18 years to pay off the balance.
That is insane. Never make a minimum payment unless you absolutely have no other option. And if you do, stop charging things to your credit card immediately and come up with a plan to pay off your debts.
How To Avoid This: Only use your credit cards to pay for things you could afford in cash today. Someone told me this once and it changed the way I saw credit cards. Credit cards are useful for building up your credit, but should not be used to buy things you otherwise couldn’t afford. Then when it comes time to pay, you’ve got the money.
(2) Not Reading Your Statement
It’s important to make sure you can account for all the charges on your card. We unfortunately live in an age where hackers are able to get ahold of peoples information too easily. Somehow, someway, someone may have gotten your credit card number. This has happened to me a couple of times. I once got a $500 charge from the State Of Oregon DMV. Pretty weird.
Now a charge like that is easy to notice, but a lot of hackers don’t do this. Many will make small charges of $10 or less. They do this to make sure it is a working card number and see if they can get away with it. If it works the next time they charge a small amount, maybe the owner of the card is asleep at the wheel. Then they really go crazy.
Always read your statement (most are online now), just to be sure all the charges you see are yours. Many card companies will refuse to help you dispute a claim if you do not notify them of the error in a timely manner. If you let them know as soon as possible, they typically refund the charge and send their claims department after the party who made the charge.
How To Avoid This: Easy, always check your charges. I’ve heard stories from friends who let charges go unnoticed and it ends up costing them. Plus keeping on top of your charges is just good practice to understand how much you’re spending.
(3) Buying Things You Don’t Need
People seem to take credit cards as a blank check to buy whatever they want. Splurge on a night drinking in PB, buying a ton of new clothes, you name it. I can only reason people do this because using a credit card defers your personal payment and may feel to some like they’re not spending money. People also just buy impulsively. You have to remember that credit cards are micro loans. Every charge you put on there, you’re asking a lender to loan you the money to buy whatever it is you’re buying. You’re gunna have to pay them back. Don’t let it get out from under you to the point where you can’t pay them back.
How To Avoid This: Avoid impulse buying. If it’s a material item you want to buy, the rule is to wait 48 hours. If you still really want it, then get it. But not before figuring out how you’ll pay for it when the credit bill comes. 48 hours allows you to reconsider your need for the item. If you have issues putting dinner/drinks charges on your credit card, try switching to using a debit card or cash to pay for these expenses. Then when you run out, you’re out. Might teach you to rein in those expenses as well.
(4) Signing Up For A Credit Card For The Wrong Reasons
This is a huge one. Someone recently told me they opened up a credit card because the lender was offering them a $50 credit towards their first months bill to sign up. That’s crazy. You wouldn’t rush out to buy a new car just because the first months payment was free. It’s a gimmick they want you to fall for.
Lenders offer tons of different promotions and gear them to naïve college students because we fall for them more than anyone. Federal Regulations have reigned in the promotions they can offer, but it’s still the wild west out there. Look no further than the Wells Fargo scandal. At the end of the day, they want your interest money. Chances are if you fell for one of their sign up gimmicks, you’re more likely to not pay in full, pay late, or not pay at all. Then they get to jack up the interest charges.
How To Avoid This: ONLY sign up for a credit card because you need one. Shop around for the best cash back offers, rates, and balance limits to find the card right for you. But don’t do it just to get $50 or receive a t-shirt.
(5) Not Reading The Fine Print
Don’t skip doing this like you do with reading the User Agreement every time Apple puts out a new iOS update. That small text is where you’ll discover when the 0% or very low-interest rate expires. It’s also how you can find out about any balance transfer fees, as well as any offer limitations like your cash back. Many people skip doing this and don’t understand what they’re getting into. Although a cards introductory rate or offers may seem great today (like getting $50), will it be great in 6 months or a year when the intro rate expires?
How To Avoid This: It’s common sense. Just take the time to read through everything before you sign it. It’s worth it.
If you knew about all of these and actively avoid making these mistakes, you’re already well on your way. If this helped you out at all, leave a comment below to let me know what you think!
Sorry I missed last week guys! I was traveling last week and got caught up in some exams when I got back into town. I’ll work to prepare articles in advance on weeks I can’t write.
As always, thanks for reading and see you next week!