Using cash may seem like a thing of the past these days. Credit cards have seemingly become the most common way to make purchases and while there are certainly advantages to using them, there are also some risks. Even if you choose to shop primarily with cards instead of a debit card or cash, it’s a good idea to make sure you understand the credit card lingo and be prepared to avoid some common credit card mistakes. Here are five dangers of using a credit card, and how to steer clear of the red zone.
1. Makes Overspending Easy
A credit card can make it easy to spend more than you can afford. You don’t have to have the cash on hand to make a purchase and you can get swept up on the impulse to buy something outside of your budget. Of course, this can lead to months (or even years) of accumulating interest and making large debt payments. You can end up paying for that item much longer than you even use/wear/enjoy it.
2. Potential Damage to Credit Score
If you use credit to spend above what you can afford and need to pay late or incompletely, you can damage your credit score and end up paying more in interest payments and late fees. (If you don’t know where you stand, you can get your credit scores for free from Credit.com, updated every 14 days.)
3. Fees & Interest
It’s ideal to pay off your credit card bill in full every month. Making only partial payments will mean you pay interest. Making the minimum payment will keep you from getting charged late fees but it won’t keep you from paying a lot of interest. Plus some credit cards, especially rewards cards, come with annual fees. It’s important to weigh the rewards you are earning against that annual fee.
4. Temptation to Chase Rewards
That leads us to another danger — chasing rewards. Some credit cards offer things like cash back, points or travel rewards. This can be a great tool to earn money for purchases you would be making anyway. But if you aren’t able to pay off your credit card balance each month, you will almost certainly end up spending more on interest than you earn in rewards. It’s important not to get swept up in chasing rewards and spending more than you can repay when the bill comes.
5. Your Cash Flow Can Be Harder to Track
When you strictly run on credit cards to make most purchases, it can be challenging to calculate how much you are spending. You may get a bill at the end of the month for much more than you expected, particularly if you have been “keeping track” in your head. However, identity theft experts suggest checking accounts online regularly — the balance shouldn’t really be a surprise. A bigger-than-expected bill could also create leaks in your budget and hold you back from reaching financial goals. Paying for things only with cash can be easier because when your wallet is empty, there’s nothing left to spend.
If used properly, credit cards can be a great financial tool. But it’s important you are keeping a close eye on your budget, buying only what you can afford, paying your bills on time and earning rewards wisely.
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