In a world increasingly shifting away from cash and financial institutions sweetening their credit card offerings, paying on credit is inevitable for most people.
According to NerdWallet’s 2018 U.S. household credit card debt study, revolving credit card balances increased five percent from 2017 to reach $420.22 billion. On a household-specific level, it doesn’t look any better. The average revolving balance is almost $7,000!
There are many reasons people end up in debt and several reasons more why debtors get stuck. Avoid being another statistic. Keep these costly credit card mistakes in mind:
Paying the Minimum
What’s one of the first things we see when we look at our monthly credit card statement? At the top in large bold font is our minimum payment total. Our overall balance is high, but the minimum calms us; it’s significantly lower and more manageable to pay.
However, it could be a lack of understanding of just how costly it is to pay the minimum that traps people in debt. In an interview with Inspirery, economic thought leader Andrew Housser explains that it’s this vicious preying cycle that led him to start the Freedom Financial Network:
“One thing that caught our attention was the enormous problems Americans faced with debt. People were not receiving even a basic education in managing their finances. Combine that with massive financial service companies actually paying behavioral economists to hone ways to get consumers to take on as much debt as possible, while paying only the required minimum payment, and you have a sure recipe for trapping people in debt.”
Not Prioritizing High-Interest Payments
Debt is rampant in our world, but for some reason, many people lack the urgency to throw as much money as they can toward their high-interest balances. According to a study in the U.K that analyzed credit card repayment behaviors of 1.4 million people with revolving balances, it was found that cardholders were only allocating 51.5 percent of their excess funds toward their highest APR card.
While two-card households were losing around $100 annually to this inefficiency, five-card households were wasting an average of $327 per year. Five-card households with a lot of debt were throwing away over $1,000 each year!
There is an exception here: when a debtor has several credit card balances and they’re looking to build motivation. In this case, the debt snowball method says to pay the minimum on all balances and use the remaining funds toward the lowest overall balance. This plan eliminates balances one by one. Each time a balance is paid off, that extra money is allocated toward the next highest payment, and so on.
Not Checking Your Credit Score Regularly
Personal finance is not everyone’s cup of tea, and that’s OK. However, not checking your credit score is negligent. After all, it’s free to do so three times per year through each of the major credit bureaus: Equifax, TransUnion and Experian.
Regularly checking your credit score lets you know where you stand and how an upcoming credit application might go. It also keeps you abreast of errors on your report and lets you know if someone is using your information to open lines of credit. Finally, when you monitor your score consistently, you can see how individual actions affect it. This allows you to put together a plan to improve your credit score.
Using Credit Cards to Pay Non-Routine Costs
Life is full of unexpected costs. Car breakdowns, major home repairs, sudden health issues, and more can all send our financial situation into a tailspin. It’s these moments where we reach for the plastic, vowing to pay it off as quickly as possible. But we forget that life (and its regular costs) still go on. The large balance and high interest rate leaves us buried in debt. Prioritize building an emergency fund so you’re never faced with having to put several thousand on a credit card at once.
Terminating Old Credit Card Accounts
Many people think out with the old, in with the new when it comes to the credit cards they carry. However, the opposite is usually true. This is because of the five factors that make up your credit score. Credit utilization and length of credit history are the second and third most important factors, comprising 30 and 15 percent of an overall score respectively. Unless the card you’re canceling is a relatively new one, your score will go down by terminating it. The lone exception is when you don’t use a card and it carries an annual fee.
Credit cards can be a powerful financial tool, but they can also wreak havoc on a person’s finances. Steering clear of these credit card mistakes will help ensure that doesn’t happen to you.