A credit card allows you to conveniently buy whatever you need just at the time you need it. It can also come in handy whenever unplanned expenses pop up, especially if your emergency funds wont suffice. However, the convenience provided by a credit card isn’t free. Apart from the temptation to spend uncontrollably, using a credit card also comes with many dangerous financial pitfalls that can have long-term effects. Here are some of the commonest mistakes you must avoid when using a credit card.
1. Making just the minimum monthly payment
According to experts, sending in just the minimum monthly payment every month might sound like a smart idea, but its not. This approach will not only lengthen your repayment period, but it will also keep your bill growing every month due to accumulating interest. So, try to make as large payments as possible every month, as this will reduce your interest rate and help you pay up your balance sooner. To make this easier, try to cut some of your expenses that are not absolutely necessary, such as cable TV bills.
2. Making late payments
No credit card mistake is bigger than late or missed payments. Most lenders charge late fees, which is usually a maximum of $25 (for the first incident). That might seem meager, but it will add up to huge sums after many missed or late payments. Worse, missed or late payments will hurt your credit score. In fact, just one late payment could significantly damage your credit rating. So, its more than important to send in your monthly payments before the deadline. To avoid skipping payment deadlines, you can set up alerts and reminders or authorize direct deduction of your monthly payments from your bank account. Missing a payment on your mortgage is even more detrimental. According to one short sale realtor we spoke to, a late on your mortgage can prevent you from refinancing your mortgage for at least a year, and in some cases two.
3. Not using your credit card
Refraining from using your credit card might sound like a smart way to avoid missing payments or spend the loan funds on your card. However, it might surprise you to know that lenders actually want to see you spend your credit. To them, the only way to prove that you’re a responsible borrower is to first use the credit and then repay it. If you don’t use your credit card, your account will most likely be closed by the lender. And if this happens, your credit score would be badly affected. Rather than refrain totally from using your credit card, use it for small purchases, so you can easily refund the used credit. This way, you’ll be able to keep your credit card account active as well as maintain a positive payment history and good credit rating.
4. Taking cash advance
Credit cards can only be used for purchases. However, there are times when you need some extra cash, and you have the option to take a cash advance which allows you to borrow cash from your credit limit through an ATM or bank. Though that sounds like a good option, in reality its a dangerous one. Cash advances usually attract higher interest rates and an automatic fee (usually 2 to 4 percent of borrowed amount). And unlike regular credit card purchases, they allow for no grace period. To make things worse, most lenders don’t consider cash advances to be paid off until outstanding balance for other purchases has been paid.