Oh, beautiful credit card… I have to admit, I have a bit of a love/hate relationship with my credit card. Yup, I have one. Despite so many finance guru’s saying you shouldn’t have one… I tend to go against the traditional methods (including the fact that I don’t pay for anything with cash..).
But here’s the thing – if you’re going to have a credit card, you have to a) have amazing self-control and b) know how to make them work for you. But so many people don’t, and chances are you could be one of the credit card mistakes that will keep you in debt and stop you from achieving your financial goals.
Credit cards aren’t for everyone, and they aren’t for every situation, even if your bank tries to convince you otherwise. Make sure you’re not making any of these credit card mistakes, and if you are, then make sure you take the steps to fix them straight away otherwise it could end up costing you a lot of money in the long run.
1 – Not Understanding The Fees That Apply To You
Do you know how much your credit card costs you to have? I don’t mean just the interest payable… but the actual cost of the credit card?
I’ve seen all kinds of ways credit card fees are disguised, and some are just straight up obvious (and expensive).
From the credit cards I’ve had over the years, they’ve ranged from $100/ year in fees, through to $400/ year. But that’s just the start. From late fees (as much as $50 for a late payment!!) through to adding a fee to your home loan that comes with a ‘free’ credit card – these are just some of the ways banks will make money from your debt.
Banks are businesses. It’s not a bad thing, but it’s just the way they are. They want to be profitable, just make sure you know exactly how much money you are giving them.
2 – Not Knowing How Long It Will Take You To Pay It Off
Let me ask you a question… how much money do you have owing on your credit card? And how long is it going to take you to pay it off?
I know, at any given time, how long it will take me to pay my credit card off, as well as the ‘maximum’ amount of time. That is how long it would take me to pay it off if the credit card was maxed out and we were on our ‘bare bones’ budget (no overtime, no additional income, the absolute minimum we would earn at any time).
People think that just because they are approved for a credit card, they don’t have to be an adult and actually work out all the details that go with it. This is part of the process. This is part of being responsible. Tough love, I know, but this is also why so many people have so much credit card debt.
If you only do one thing, it’s this: work out how long it’s going to take you to pay off your credit card. It might actually surprise you.
3 – Only Ever Paying The Minimum Repayment
You know when you get your credit card bill every month and it shows you the payment required. When you see how low it is you kind of smile… you’ve got this shit under control!
Sorry… but no.
My favourite credit card resource is this credit card calculator that shows you how long it will take you to pay off your credit card if you only pay the minimum repayment.
The average American credit card debt is $5700 and the average credit card interest rate if you have good credit is 20%. This means that if you were to only pay the minimum repayment on your card, it would take you 48 years and 6 months to pay off your credit card (providing you didn’t put any additional purchases on it).
If you’re going to have a credit card, you need to be able to pay out the balance every month without incurring any interest. If you have a zero interest credit card (mine is no interest on purchases over $250 for 6 months) then you need to ensure the balance is paid off before any interest is charged.
If you cannot handle this level of credit card management, then credit cards are not a good option for you. (Sorry, not sorry).
4 – Using Your Credit Card As Your ‘Emergency Fund’
Anytime someone tells me that they have a credit card ‘in case of an emergency’ I kind of want to grab their shoulders and shake them!! (In a totally loving and non-violent way of course).
Let me be super clear on this:
YOUR CREDIT CARD IS NOT YOUR EMERGENCY FUND
Not only is this bad for a bajillion reasons, but if you’re using your credit card as an emergency fund, are you sure there’s always enough money available on it? And your emergency fund is for when an emergency happens, which often means you need quick access to money, and you don’t want to be in in a situation where using that money will then place further stress on you (such as needing to pay it back).
I’m trying not to get super ranty on this one but it’s so darn important.
An emergency fund is an account you keep separate to everything else, that can be accessed when you need and is your money. You should have at least $1000 in there that is available to you at all times. Once you’re in a position where you’ve paid off all of your debt, then you can build on this emergency fund (but that’s a different story for another day).
One of my most favorite tools for managing and tracking my money is PocketSmith. It syncs all of our finances, including our loans and assets – which means it shows us our overall wealth. It’s also great for finding and tracking changes in our spending (so we can budget accordingly). I’ve tried so many different apps and this is the only one that I loved. PocketSmith is so easy to use and my husband loves how he can see how much we have left in our budget at anytime.
5 – You Keep Spending With Your Credit Card When You’re Trying To Pay It Off
You can’t pay off a debt if you keep adding to it. You’re just perpetuating the cycle. If you’re trying to pay off your credit card (woooohoooo – go you!! you can do it!!) you need to cut up your credit card and stop using it.
Build up your emergency fund so you have money ready if you need it (for emergencies only) and then do everything you can to pay your credit card off as fast as possible. You can see from the calculator above how much a credit card can cost you if you keep using it and don’t pay it off. They aren’t ‘convenient’. They are expensive when they aren’t used properly.
If you can’t pay off your credit card in full, with confidence and on a regular basis so you don’t incur interest, then a credit card isn’t for you (sorry, again, but when it comes to finances sometimes we need to hear the truth).
If you’ve made any of these credit card mistakes, you aren’t alone. I’ve done them (literally all of them) and you can change your ways and make credit cards work for you. But you need to be educated about them, savvy with them, and you need to understand your own finances.