Credit cards seem like the easiest solution to all our money problems. Whether you are in a financial pickle right now, you want to take a long and overdue vacation or you want to try saving by unconventional methods such as earning discounts and discounts on your purchases instead of reducing your purchases, credit cards are our one step solution. Although, having a credit card is beneficial on many levels, there are certain dangers of credit cards that you must be aware of. These are typical credit card mistakes that are made by most of us. Credit Cards are largely beneficial when they are used correctly, however, when used inappropriately, you might end up paying a huge penalty for even the smallest errors in judgement.
Following are the major credit card mistakes that are commonly made by customers
The most common credit card blunder is owning too many credit cards. Before you start collecting credit cards like trophies, you need to pause and think again if you really need that credit card right now or are you simply buying it because of the attractive introductory offer / promotion / reward points etc. The more number of credit cards you own, the higher your debt will be. Always note that your credit cards are not your supplementary income. They carry one of the highest interest rate structures when compared to any other financial products and services. There is also the annual fee of each of your credit card to consider. When you have one or two credit cards, the additional fees and debt becomes manageable and the rewards that you receive from the cards can add to your savings, however, if you own way too many credit cards, the benefits of your rewards will disappear behind your debt and any rewards or discounts the cards may offer you.
Furthermore, owning too many credit cards can affect your credit score adversely and can have a negative impact when you try to borrow money from any bank or financial institution in the future. Owning credit cards with high credit limits will increase your total debt to income ratio, but if used wisely, can help improve your credit score by lowering your credit utilization ratio.
There is always a question of how many credit cards are too many? Now, if you own around 3 to 5 credit cards, generally it is not an issue. But, if your total credit card balances are gradually increasing, this is a sign of danger.
Many customers fall into the pitfall of introductory rates offered by banks. Let’s say that a bank is willing to offer you a no interest balance transfer facility if you transfer all your other credit card balances into their one card. An offer this tempting, you may not think twice before you accept this facility only to realize later that the 0% interest on the balance transfer was only for a short or initial period of time and now that the period has elapsed, you are paying an even higher interest than what you did before the transfer. Therefore, it is extremely important that you understand the terms and conditions of any facility you accept regarding your credit card including the introductory rates. There are many banks that do not include new purchases as part of the promotional rates offered, thereby prohibiting you from using your balance transfer credit card for new purchases.
The same logic is applied for any other offers and deals a credit card issuer is offering you in terms of discounts, offers and interest rates. When you see a single digit interest rate, you are immediately swayed and purchase the new credit card, however, once the period of the reasonable interest rate elapses, the increase can even be two – fold. Generally, the interest rate on credit cards in Singapore is between 20% and 28% today. But when you applied for these credit cards, the maximum interest rate that you were paying at the time was lesser than 15%. The standard promotional / introductory period lasts for about 6 months and a maximum of 1 year. Even the waiver on annual fees year after year have certain clauses attached such as a minimum of ‘X’ amount needs to be spent per calendar year in order to enjoy the waiver.
It is very easy for a shopaholic to lean towards buying a credit card that offers unconditional rewards/ discounts / rebates on all your shopping escapades, however, you will need to understand and evaluate if this particular credit card suits your current lifestyle. This card might offer you an array of shopping vouchers and discounts month after month, but on the other hand it may also charge you an interest rate of 28% per annum. Additionally, the more you delay on your payments, this interest will only continue to compound, piling your debt only to implode in the near future. You need to therefore evaluate if the rewards that this credit card is offering you will benefit you in the long run or cripple your lifestyle altogether. A low interest rate credit card, with however little benefits it offers is the safest way to manage your debt and lifestyle at any given point in time.
An Annual Percentage Rate or an APR will calculate your credit card balance on an annual basis and will include all additional charges that otherwise go unsolicited when compared to your interest rate that is only computed on a month on basis and will not include all other charges. An APR gives you a better understanding of much money you owe when all charges on your credit card are taken into account.
There are many of us even today who stick to only making minimum payments on their credit cards rather than clearing the total outstanding bill. When you only make minimum payments, the interest rate currently charged on your card starts compounding and you end up making payments at a much higher interest rate of interest than before. This will seemingly increase your total debt threefold and you will be stuck in a whirlpool of credit card payments for much longer than you anticipated. The best strategy to avoid paying higher interest on your payments is to clear the outstanding balance on your credit card on a monthly basis.
This is another common mistake that credit card holders make today. Although paying off your bills late seems better than not paying them at all, it is not that much better. Each time you make a late payment on your bill, you are charged a late payment fee. This fee can even be higher than your minimum payment and most importantly it can damage your credit score affecting any future loans and accounts you may apply for with any other bank or financial institution in the future. Always check your due date on your monthly statements and make the payments on or before time. Additionally, apart from keeping tabs on the date of the due payments, also keep track on time. The payments due are always fixed on the same date each month. Therefore, in case date falls on a weekend, whether it is a business day, public holiday etc. making the payment on the first business day after the off day will count as an on – time payment. Also, some banks have additional rules such as the payments should be made before a particular time on the specified date in order to be counted as on – time payment. If you have setup automatic payments through your bank, you need to ensure that that date and time are correct.
This mistake is far too common when you have setup automatic payments through your bank to take care of your payments regularly. However, you must always keep a check on the bills that you receive on a regular basis to see if all the charges have been accounted for or are you being charged for purchases you never made. In case of an ID Theft, you will not know that someone else has gotten a hold of your account information and has been using your date to make transactions and you are still paying for those transactions. Additionally, in case of an ID Theft situation, you are usually given between 45 to 60 days’ time to dispute any charge on your credit card as a fraudulent transaction after which there is nothing you or the bank can do for you. If you realize a case of ID Theft on a fine day when you decide to take a look at your statement and find out that you have been paying for purchases made by someone else on your card and that you have waited too long to dispute those charges, you will be left with no choice but to accept them because you missed the deadline to dispute any of those charges. Also, if you plan on disputing any charge, do not pay for the charge upfront without having the issue settled. It is therefore very important to keep checking your monthly statements religiously to know exactly what is going on with your account and what you are essentially paying for.
Nothing is more embarrassing that having your credit card rejected at the cash register. To avoid such situations, go back to the previous point of checking your monthly statements regularly to be aware that you are not anywhere close to exceeding the credit limit on your card. When you check your statement and notice that you are on the brink of exceeding your credit limit, then start paying for your consecutive purchases with cash or another card. As an alternative, you can also request for an increase in your credit limit from your credit card issuer. Although for the latter, your issuer will perform some further checks and request for documentation before increasing the limit on your credit card. If you have exceeded your credit limit, two things can happen – either your credit card will be rejected point blank or the payment will go through and you will be charged an over limit fee on the transaction. Neither of these two are a healthy practice. Therefore, when you discipline yourself by keeping a constant check on your purchases as well as the limit on your card, you will learn not to exceed your credit limit.
Again going back to the previous point of religiously checking your monthly statements, it will you an idea of how many of your purchases are a result of your enthusiastic splurge and how many were actual essentials that you needed to run your daily life. Buying things that you want are alright because everyone has wants that are separate from their needs and it is ok to indulge yourself once in a while, but what if a majority of your purchases lean on the indulgence side and less on the essential side? This is not a good side to be on. When you analyze your monthly statement, you can be surprised as to how many you have bought that you never really needed the previous month and ones that you could have easily lived without. We have all surrendered to impulse purchases at some point in our lives but it should remain at those points and not be some point during each day. To avoid such impulsive purchases in the future, you can always wait around 48 hours before purchasing the item so you have sufficient time to think and ponder if you really need to make that purchase or can you live without it. If after 48 hours, your response is still yes, then you can go ahead and make the purchase knowing that it wasn’t simply one of your impulsive decisions you may regret in the future.
Analyzing your monthly statements can even help you to draft a budget that can give you more control over your future purchases on your credit card. This can also free you from constantly worrying about your financial troubles regarding your credit card / s.
Any and all credit card mistakes can be avoided if you have a strategy to tackle them. All you need to do is tune your financial wants and desires to your financial resources and you will avoid even the rarest of credit card mistakes. Using these aspects, you can now reap the best benefits your credit cards can offer you without suffering any loss.