There are many benefits to having a credit card. Some can help you to establish a good credit score, offer rewards on transactions or help you to spread the cost of a large purchase.
These benefits are often what attract customers to credit cards in the first place. However it shouldn’t be forgotten that the success of them largely depends on how well they are managed. A well-managed credit card can be very beneficial to your finances whereas a poorly managed card could cause financial problems.
Throughout this article we are going to discuss 3 of the most popular credit card mistakes that you should avoid at all costs.
Interest Out - Cash Back InCash back credit cards work on the basis that you spend money throughout the course of the month and then earn cash back as a reward for your spending. Most cards will have an introductory offer such as 5% cash back in the first three months, this means if you use your card for the bulk of your spending you could find yourself with a earning a decent amount of cash back.
The problem is, these cards also have quite high interest rates (usually around 20% APR) meaning if you fail to repay the balance in full, the interest you are being charged could outweigh the cash back you are earning. By tracking the amount you are spending and paying off the balance in full each month you will never risk losing any of your hard earned cash back in interest charges.
Only paying the minimum paymentDon’t get me wrong, making the minimum payment is better than not paying at all, but it’s certainly not a trap that you want to get stuck in. The minimum payment is generally around 3% of the outstanding balance and will be stated on the bill. The problem is although you may feel like you’re steadily chipping away at the balance interest is accruing at a similar rate meaning you’re barely shifting any of it.
In fact, if you have $3,000 worth of debt on a 17% APR credit card and you only ever pay the minimum payment of 3% it will take you over 17.5 years to repay the balance! In this time you’ll have accrued $2,200 worth of interest making the total cost of credit $5,200.
Multiple applicationsOne of the most effective tools to use when searching for a credit card is the comparison website. By entering your details and requirements the comparison engine will return a lengthy list of providers that may be able to help. Its then up to you to decide which lender meets your needs best.
The worst thing you can do in this situation is apply with a number of lenders in the hope that this will increase your chances of approval. This isn’t the case, by applying with multiple lenders you could actually be shooting yourself in the foot. This is because when you make an application the lender will carry out a credit search, every time you are credit searched this will leave a footprint on your file. If a prospective lenders sees that you’ve applied to multiple lenders it may indicate that you are desperate for money or financially unstable. Very few providers will be willing to lend to someone who looks financially unstable, regardless of whether they actually are or not.