Credit cards are a crucial tool in our financial lives and provide flexibility and protection when using today’s multi-channel payment options. A credit card track record establishes evidence of your financial responsibility and creates a foundation for larger purchases, such as homes. Enjoy the optimal benefit from your credit cards by avoiding these four bad credit card habits:
1. Making Late Payments
Ignoring credit card due dates is an expensive indulgence. Late fees will be imposed when you miss the payment deadline, but those fees are actually the least of your worries. Making a late payment will often trigger a permanently higher interest rate on your card and lower your credit score. A lower credit score means that any future loans you obtain will come with higher interest rates. You may end up paying thousands of dollars more on your mortgage as a consequence of simply forgetting to pay credit card bills on time. Don’t know how healthy your credit score is? Here is an easy, free way to get it.
2. Paying Off Other Debts with Credit Cards
Borrowing money in order to repay borrowed money is a dangerous habit. If you use your credit card to pay the monthly installment on your student loan or auto loan, you may get the mistaken impression that you’re moving forward financially. In fact, you’re only adding extra interest charges to an existing obligation, since credit cards generally carry higher interest rates than student or auto loans. Meanwhile, you have not decreased your actual indebtedness at all.
3. Not Paying Off Your Card Each Month
Paying your entire credit card balance each month is the best possible practice, and you should always budget with that goal in mind. It’s helpful to keep track of credit card expenditures as if they were checking account debits, so that when you receive your card statement you’ve already set that money aside. If you occasionally can’t meet this paid-in-full goal, be sure to pay more than the required minimum. Stop using the card and create a budget that will allow you to pay off the balance in as short a time as possible. Here are some more tips to help you pay down your debt.
4. Using Your Credit Card as the Sole Emergency Fund
Emergencies aren’t really unpredictable; no matter how careful you are, eventually something will take an unexpected bite out of your monthly budget. Cars break down, accidents happen, and plans fall through. Sensible budgeting recognizes this reality. You need to create a “rainy day fund” to cover unexpected expenses. It’s possible that your credit card might be needed as an additional fallback, but it shouldn’t be the first place you turn when an emergency strikes.
Just as you make choices to improve your physical health, you can also strengthen your financial fitness by using credit cards wisely. The outcome of breaking bad credit card habits will be a long-term foundation of financial strength.