Credit cards can be an effective tool in building or improving your credit score and saving on interest charges, but overspending, late payments, and cash advances can become dangerous tools in your financial toolbox.
Follow these tips to keep your credit card safe, and ensure that any outdated cards are cut up before disposing of them.
1. Overspend
Credit cards make it easier to purchase items you might otherwise be unable to afford, but those frivolous purchases can quickly accumulate, leading to debt and late payments with high interest rates — both of which can damage your credit score.
Treat your credit card like cash; only charge items that you know you can afford to pay back by your payment due date, no matter your limit. After all, spending power is only gained if it can be paid back in full each month.
If you find yourself overspending, try setting spending alerts on your credit card account or taking a break until your spending can be reined in. There are also workbooks and courses that can help identify what drives your spending and replace bad habits with more positive ones – almost everyone overspends at some point; it doesn’t have to become an ongoing problem!
2. Take out a cash advance
Cash advances are an expensive way to withdraw funds from your credit card, with high transaction fees and interest rates that should only ever be used as an emergency measure. There may be less-expensive alternatives such as borrowing from family or friends or using money wires which might better meet your needs.
Credit card companies pay close attention to how consumers use their cards for cash advances and may offer a separate cash advance credit limit that is lower than their total card limit. Since there is no grace period associated with cash advances, interest begins accruing immediately.
If you must obtain a cash advance, make sure it is an emergency and devise an approach for paying it back without incurring interest charges. In general, emergency savings accounts or borrowing from friends is best as an easy way of managing repayment terms without incurring interest charges. Furthermore, cash advances could harm your credit utilization ratio and adversely affect how lenders view you in future loans.
4. Make a late payment
Credit cards can be powerful financial tools when used appropriately and wisely, offering convenience, security and rewards. But misuse could prove disastrous financially.
One of the primary ways that people fall into debt is by failing to pay their credit card bills on time, which can quickly spiral into overwhelming debt. One way to prevent this from happening is making sure to pay your bill promptly every month – most credit card companies provide reminders or allow automatic payments if this becomes difficult for you.
If you miss a payment, take prompt action to resolve it. Credit card companies would much rather work with you on getting your debt paid off rather than selling your account to collection agencies for pennies on the dollar. In fact, many will waive late payment fees and not report your lateness. Make a payment immediately, then try your best to stay on track in future.
