Credit cards come in handy when it comes to making a quick purchase even without having cash. They also offer enticing perks and help you get cash backs for your purchases. Some people also use credit cards to build good credit that is useful to secure a mortgage or auto loan. But there are several dangers associated with using credit cards irresponsibly. Especially for first-time users.
If you are about to get a new card or wondering how to use it responsibly, understanding the common dangers of credit cards can help you adopt good habits to stay away from those dangers. There are many ways you can use your card wisely to build good credit instead of building a wall of debt.
Below are some dangers of credit cards and ways you can avoid them efficiently.
Confusing Credit Card Terms
Many confusing terms are out there in a credit card offer. For instance, most companies offer balance transfer credit cards. And they usually come with different interest rates (one for 0% APR duration and the other for when 0% offer expired). Misunderstanding credit card terms can cause serious financial consequences like increased interest rates or transaction fee etc.
Carefully going through the fine print is a good idea to read and understand credit card terms before signing an agreement. Also read through the rewards and perks included in the offer so you can avail them cautiously.
The Enticement to Overspend
According to experts, credit card users spend more when they are using the card for payments than paying via cash. It is very easy to spend on unnecessary things when you are able to swipe a card instead of making payments with cash. Overspending can build a huge wall of credit card debt that puts a strain on your personal finances.
Setting personal spending limits for each month can help you utilize credit limits as lower as possible. In this way, you will be purchasing only what you can afford. Also, avoid spending on things you cannot afford.
Interest Makes It Harder to Pay Off the Balance
Making credit card payments in full is a great way to avoid paying interest at all. If you often skip monthly payments or make partial payments, then you will be paying a big amount towards the agreed interest payment. As a result, you will build credit card debt.
Paying your credit card balance in full is always suggested by experts as it keeps interest payments as lower as possible. If you are unable to pay in full every month, you should pay for what you can afford. Using the balance transfer feature is also a good way to transfer your balance to a 0% credit card so you can pay the debt faster without making any payment towards interest percentage.
Risk of Building Debt
You build debt whenever you borrow from someone. The more you get credit and don’t make payments in full, the deeper you get into debt to put your finances in danger. When you use credit cards everywhere and not making monthly payments in full, you will be building credit card debt. And when you are in debt, it is impossible to reach financial goals.
This is where having a proper spending plan and adopting good spending habits come into play. If you find it hard to make credit card payments on time, you should stop using your credit card until things are in your favor.
The danger of Building Bad Credit
Since credit cards are commonly used to build good credit, they can also ruin your credit history when used irresponsibly. If you are unable to make a singly monthly payment, your credit scores will drop. The more you miss payments, the more your credit history will get a hit.
The ideal way to build good credit via credit card is to pay in full and on time every month. You should also keep your balance below 30% of the available credit limit. Spending only what you can easily afford can also help improve your credit score.