October 8, 2020
By Rahul Iyer
You have credit cards for a reason – to use them, right?
Possibly, but credit cards come with many dangers and if you aren’t careful, they could ruin you financially.
Before you use credit cards, understand the dangers of credit card debt, and how to avoid them.
Interest adds up faster than you realize. Take a $1,000 purchase today for example. If you only make the minimum payments and the interest is 19.99%, it would cost you $1,200 in interest and would take 9 years to pay it off!
If you charge something that you know or aren’t sure you can afford, don’t buy it. Swiping plastic isn’t a means to free money, every day the amount is outstanding beyond the initial grace period (30 days), costs you more money.
If you pay your credit card bills on time, you probably think they don’t hurt your credit. While a timely payment history is one of the most important aspects of your credit score, so is the amount of debt you have outstanding.
Credit bureaus measure your utilization rate on a 30% threshold. In other words, if you have more than 30% of your credit line outstanding, it negatively affects your credit score. In addition, your credit utilization rate makes up 30% of your credit score, which is the second largest component of it.
Many credit cards have various terms that apply to different balances. It can be confusing to know what you owe and when. For example, if you have an introductory rate on a credit card (let’s say 0%), you may think you have free rein to spend because it’s free, right?
What many consumers don’t realize is the introductory rate ends and with it comes the accrued interest you were able to avoid with the 0% APR. Once it expires, you owe interest on any outstanding balance from the start, plus the interest that accrues moving forward. This can lead to even worse credit card debt than you realized.
Credit card debt is avoidable – just don’t use your credit cards. If you have credit card debt plus other debts, like a mortgage or car payment, it’s hard to get ahead on those debts, paying them off early because you’re constantly managing credit card debt too.
Credit card debt also takes away from any money you could save for retirement. Since credit card interest rates are usually much higher than any rate of return you could earn on retirement savings, it’s best to get yourself out of credit card debt so you can free up funds to save for retirement.
Avoid going into credit card debt as much as possible. If you can’t avoid it, keep it to a minimum and always step one step ahead of the payments. Pay off the debt as soon as you can and focus your money elsewhere, especially your future.