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It’s difficult getting through life these days without a credit card. While many people simply take them for granted, others walk a daily tightrope in managing their credit cards where one slip could suddenly send their credit situation tumbling down. In either case, all it takes is one mistake to turn your financial dreams into a nightmare.
Credit card mistakes usually result in higher interest charges or a lower credit score, either of which can be very costly. The problem is that many people don’t understand the magnitude of what they might think is a harmless little mistake. But when you understand the costs it should be enough to make you lose some sleep.
These are five common mistakes people make with their credit cards that can and should be avoided if you want a good night’s sleep:
Making minimum payments
This could very well be the most costly mistake you could make as it can add hundreds or even thousands of dollars of interest charges over time, and it can adversely impact your credit score. Making minimum payments on your credit card balance can explode your interest costs to nightmarish proportions to where it could take years to pay down the debt. Also, the credit bureaus don’t take too kindly to minimum payments, especially if it results in your debt-to-credit limit ratio to increase. You should always make more than the minimum payment on your credit card balance, even if you have to cut other things out of your budget.
Missing a payment
When finances get tight, people sometimes need to do some major juggling of expenses and payments to get through to the next pay day, and it is often the credit card payment that falls on the priority list. The rationale for some people is that, as long as they pay it before 30 days, it won’t be reported as a late payment. While that may be true, the damage to your credit begins the moment your payment is late.
That’s because the credit card issuer is likely to boost your interest rate, especially if you have had more than one late payment. In addition to a late payment fee, you may see your interest rate increase by as many as four or five points. That could lead to more problems if you find yourself having to make minimum payments as a result of the higher costs.
Dancing the balance transfer shuffle
There are few things more tempting than a 0% introductory rate offer, especially, if you’ve managed to rack up some high interest debt on another card. The problem is, if you are having problems paying down the debt on one card, you are very likely to continue having problems on the new card.
Balance transfers can provide some temporary relief from high interest payments; however, once the introductory period expires you’re right back where you started with another high interest payment to make. You could also find yourself with too many credit cards (another mistake) which can hurt your credit score.
Balance transfers only make sense if you are able to pay off the balance during the introductory period, or, at the very least, you are able to take advantage of the 0% interest to substantially pay down the debt.
Cancelling your credit card accounts
One of the things some people do when they turn over a new leaf in their credit management is to cancel some of their credit card accounts. While this might seem like a positive step to better credit management, it can be a big mistake. When you cancel a credit card account, you also reduce your available credit.
This could have the effect of increasing your debt-to-limit ratio, especially if you hold on to accounts that have a balance. It’s better to focus on paying down your debt and keeping your debt-to-limit ration well below 25 percent. If you want to cancel credit accounts, you could probably get away with canceling some store credit cards because their credit limits are usually very low.
Not using a good rewards credit card
The competition among issuers of rewards programs has become so fierce that we are beginning to see some amazing cash back rewards. Some cash back programs pay as much as 5 percent cash back on certain purchases and 3 percent on gas and groceries. There are also 10 to 20 percent cash back bonuses paid on purchases made through the programs online shopping mall.
If you were to use a cash back rewards credit card on your every day purchases (with the full intent of paying the balance in full each month), you could see hundreds or even thousands of dollars in cash back credits to your account over the course of a year. By not using cash back rewards card you are, in essence, throwing money down the drain – big mistake.
Of course, it would be a bigger mistake if you use a cash back rewards card and then fail to pay off the balance each month because the interest charges, which are typically higher on rewards cards, will negate any cash back bonuses.
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