Common credit card mistakes are easily avoidable with the right education. This articles is to serve as a beginner’s guide to using a credit card.
Most people know what a credit card is but for those of you who don’t – a credit card is a small, rectangular piece of plastic that is connected to a financial account that acts like a short-term loan.
This card allows you to make a purchase and pay it back at a later time.
Since you do not need to have the money upfront to make a purchase, a credit card can potentially be very dangerous for someone who likes to spend money.
InvestMoneyRight.com is here to make sure you don’t find yourself with a credit card nightmare on your hands! By using your credit properly, you can avoid common credit card mistakes and take advantage of the rewards credit card companies have to offer.
How Does a Credit Card Work?
- First, you must sign up for a credit card and get approved to recieve one. This will require a credit check. If approved, you will be assigned a spending limited. Your spending limit will be determined by your credit history. Better Credit History = Higher Spending Limit.
- Once you receive your card you can make a purchase, either online or in store, using your card to pay. When you use your card, the credit card company pays for your order and you pay them back at a later time. Normally you have 30 days to pay a credit card balance before occurring interest charges (I’ll talk more about this soon).
- Your credit-spending limit will determine the amount you can charge on your card. The total of all your purchases on your credit card at any point in time cannot exceed your spending limit. If your limit is reached, the card will be declined when you try to make a purchase. (By living within your means, you will not have to max out your credit card every month!)
What Happens if You Cannot Pay Your Credit Card Bill Each Month? – Common Credit Card Mistakes
By not paying your bill, the credit card company starts to charge you interest on the balance you owe. This is one of the worst common credit card mistakes consumers make. And this is where you can get into a lot of trouble if you are not responsible for what you buy on a daily basis.
Interest is the cost of borrowing money from the lender and not being able to pay it off within 30 days. This charge will continually get charged on your bill, every month, if you are not paying off your bill in total by the due date.
Interest rates are extremely high when it comes to credit cards. They can cost you thousands of dollars if you buy more than you can afford. This is why it is VERY IMPORTANT to only use your credit card if you are able to pay off the entire balance at the end of the month- avoiding any interest charges.
To learn more about interest and how it can affect your purchases, read my post – Interest: How it Affects You. Avoiding these common credit card mistakes is an important part of your personal finance responsibilities.
How To Properly Use a Credit Card Without Occurring Interest Charges.
To properly use a credit card you simply have to only buy what you need and be able to pay the balance off in full EVERY SINGLE MONTH, no matter what!!
It’s that simple!
By having this mindset you can separate yourself from one of the most common credit card mistakes a person can make – Not paying their bill on time.
Credit cards do not always have to be a bad thing if used correctly. If you can be a responsible spender and not buy over your needs, a credit card can offers benefits you might like. For example, improving your credit score.
One of the biggest benefits of using your credit card properly is increasing your credit score. As I mentioned above, higher credit scores lead to lower interest rates on your biggest purchases (e.g. House, Car, Boat). The long-term effect of getting low interest rates means you save thousands of dollars in interest cost that other people unknowingly pay!
Along with increasing your credit score, most credit card companies will offer some kind of incentive for you to sign up for their credit card. This could be a free round trip flight to huge bonus points for signing up.
In addition to sign-up bonuses, most credit cards have some kind of reward programs. These “credit card rewards” can range from points for flight/hotels to cash back offers on purchases you make. If you are able to maintain responsible financial habits, you will be able to take advantage of these rewards without paying any fees!
Why Do Credit Card Companies Offer Rewards?
Every time you make a purchase using your card, the company that issued that card to you collects a small fee from the retailer. The more you use your card, the more fees the credit card company collects.
Since credit cards lead to consumers buying more goods, retailers gladly accept them as way to purchase. Even though retailers pay a small fee for accepting credit cards, it’s greatly out weighted by increase sales they receive.
Credit card companies also make a lot of money off consumers’ late fees and interest charges for not paying their balance in full.
Pros of Using Credit
- Helps Build Your Credit – Building your credit score is extremely important if you ever plan on buying a car or house. Since most people don’t have access to the money needed to buy a car or house out right, they must get a car loan or mortgage to pay for their purchase. If you don’t have good credit, you will be subject to a higher interest rate, costing you more money.
- Earn Reward Points – When you use your card, you earn points that can be used for free flights/Hotels/or even cash back. Now don’t let these points get you too excited, since the only way to earn them is by spending money.
- Security – When you make a purchase with a credit card, you have fraud protection. If unwanted charges appear on your monthly statement, file a report to your credit card company. They will help you receive the refund that you deserve.
Cons of Using Credit – Common Credit Card Mistakes
- Interest Charges – This is the scariest thing about credits cards. Interest rates can be as high as 25% and cost you tons of money.
- Impulse Purchases – Knowing you can buy something even though you do not have the money currently can lead to impulse purchases. Before you know it, you are over your head in credit card bills you cannot afford. This is the main reason not to use a credit card.
- Having Multiple Credit Cards – This only increases your chances of misusing your credit card and spending more.
- Membership Fees – Some cards charge membership fees. I prefer not to get a card with a membership fee unless its really makes sense for you and your situation.
Credit Card Terms to Know
- Minimum Payment Due – This is the minimum amount the credit card company wants you to pay so you don’t get a late fee. THIS IS NOT YOUR BALANCE! By only paying your minimum payment, you will get charged interest because you didn’t pay the entire balance off in full for the month.
- Statement Balance – This is the amount you owe for your previous billing cycle. As long as you pay your statement balance every month, you will not be charged any interest fees. This amount may be less than your current balance. That is because your current balance includes all your recent charges as well.
- Current Balance – The total amount you have on your credit card at any given time. This amount cannot exceed your spending limit.
- Late Fee – This is a fee for not paying your bill on time. This fee is in addition to the interest fees you will get penalized with.
- Interest Rate – This is the cost of borrowing money for longer than the “30 days interest free” time frame. This fee can be as high as 25%!! That is insanely high! If you don’t understand what interest is, YOU MUST READ THIS!
- Statement – This is your monthly bill that I recommend you pay in full every month!
I hope this post helps you make smart decisions when you think about getting a credit card. With the right education, you can learn to use a credit card properly. Too many people fall victim to credit card debt just because they don’t understand what they are getting into. Here at InvestMoneyRight.com, we hope to provide valuable information to stop you from making common credit card mistakes!