Common Mistakes That Lead to Credit Card Debt
Credit cards are a blessing and a curse. They can be beneficial for building credit and giving you certain perks such as travel rewards or cash back. However, when used incorrectly, they can tempt you to take on excessive amounts of debt. Most people don’t realize what they’re doing until they check the statement and realize they have racked up a balance of thousands of dollars and have no idea how to begin paying it off. Here are some common mistakes people make that lead to credit card debt and how you can avoid them:
Not Setting a budget
Having lines of credit is great. Being smart with them can help you build credit and give you lower interest rates on things like auto loans and mortgage payments. However, not setting a budget for how you spend money is a disastrous decision. When you don’t set budgets ahead of time, you open yourself up to spending more than you earn and buying things you don’t actually need. When you do this, you’re more likely to have to start charging your necessities and using balance transfers to manage all of the debt you’ve accrued. Before spending any money on your card, set forth a plan of how much you should spend on each category- and make sure your income can afford it!
Opening Too Many Cards
Most people find the best number of cards to have is between two and four. Having a few is good for building your credit score. However, when you open a card, you need to keep in mind that your score will take an initial hit and stay with you for roughly six months. Plan your timing accordingly- especially if you have any big purchases coming up, such as a car or house. Having more cards than this can tempt you to spend more money than you should, especially if you have ones with particularly high limits. One way to combat this is to ask for lower limits. You ARE allowed to do this. That way you won’t be tempted to spend more than you should.
Making only the minimum payments
Minimum payments may offer you some stress relief- and is definitely better than missing payments altogether. However, it will cause you to stay in debt longer because you’ll be accruing interest. In fact, depending on your balance, paying then minimum payment may not be paying anything off except the interest charges. It’ll be like you’re on a hamster wheel- you’ll be paying and paying and never actually get anywhere as far as your debt goes.
Validating Spending Money for the Rewards
This mistake is especially popular among the younger crowd. The initial reason they opted for credit cards was for the rewards programs. While this isn’t a bad reason to get a credit card in general, it’s essential that you pick the one with the right rewards for you. If you don’t fly or stay in hotels often, getting a travel rewards card may end up costing you more in fees than it would give you in rewards. You may even start charging things you don’t actually need, just because you can get 2% cash back. Before you know it, you’ll be up to your ears in junk and debt.
Not reading the fine print
We get it; no one likes to read the fine print. Most credit card companies bank on the fact that you’re going to click the “I’ve read the terms and agreements” box when you did not, in fact, read them. Some factors you really need to understand before you open a card are fees from balance transfers, cash advances, late payments and over limits; as well as the card’s annual percentage rate (APR). This is especially true if your APR will change after an introductory period. Being aware of these can help you to make better decisions about spending your money.
Keeping High Utilization Ratios
A utilization ratio is how high your balance is compared to your total available credit. Your cards are not meant to be maxed out. In fact, you shouldn’t even get close. The bank may say that you have a $10,000 limit, but you should think of it as being only $2,000. When you keep your balance below 20% of your actual limit- and make consistent payments- it can help your credit score go up and keep you from piling on a considerable amount of debt.
Not Asking for Help
If you find that you’ve made these and other mistakes in the past and you now feel like you’re drowning in debt, you may have more options than you think. Talking to a professional is the first step to relieving your debt. Call our Orlando bankruptcy attorney at 407-969-0044 and set up your free consultation. We’ve helped more than 1700 clients, and we can help you too. Make the best decision for you and your family today.