It’s not unusual for even the most savvy credit-card-carrying consumer to fall into some of the most popular traps for spenders set by credit issuers. I write about using credit cards wisely, but unfortunately, many who don’t get penalized with interest and fees. Even those who always pay their credit card bill in full are assisting the issuing companies and banks through the interchange fees merchants have to pay to Visa, MasterCard, and American Express each time they accept a payment using a particular credit card.
Americans for Fairness in Lending (AFFIL) and Consumers Union have devised ten tips that should always be considered when making decisions about your credit card usage. While the article is primarily intended for college students, there is nothing about these tips that would make it exclusive to a certain level of educational progress. I’ve added some of my own thoughts.
1. Don’t get tricked, trapped, or suckered into a card with bad terms. AFFIL suggests looking for a low long-term interest rate rather than a teaser rate. This is a moot point if you are able to consistently pay your bill in full. Unfortunately, not everyone can make that kind of commitment. If you know you’ll be spending in debt for a while for whatever reason, and you don’t want to risk your credit score by jumping from one introductory offer to another, look for a low long-term APR.
2. Once you choose a card, don’t let your guard down. A “fixed” interest rate doesn’t mean that they can’t change your rate. Chances are your interest rate will change at least once, and the notices that warn you ahead of time often look like any other junk mail. In my experience, some companies are notorious for “forgetting” to send your credit card bill. If you’re not on top of your schedule, you may miss a payment. This could have very expensive consequences.
3. Pay your bill on time. It’s not enough to get your payment to the credit card company in the nick of time. Get it there early so there’s no question whether you missed the deadline or not. Setting up automatic payments can be a good idea, but not many credit card companies allow you to pay your bill in full each month. Usually, if you set up a payment schedule, it must be for a consistent amount each month.
4. Pay your bill in full. This is fourth on the list, most likely because these tips seem to be in chronological order rather than importance order. As a matter of importance, this is probably at the top. This is the only way to avoid paying more than you should for any purchase on your credit card. Once you don’t pay any bill in full, many credit cards employ two-cyce billing, which means you could owe even more interest even after you think you’ve paid off your entire balance.
5. Do not go over your credit limit. In the “old days,” credit companies would decline your purchase if you hit your credit limit. Now they let the transaction complete and add on “over-limit fees.” Also, a high credit limit might entice someone to spend more than they can afford. If the credit card companies think that Johnny can handle a $10,000 credit card bill, they must be right, right? Nope.
6. Stay as far away from a credit card “cash advance” as you can. This is one of the most expensive forms of debt available, except for perhaps payday loans. It’s usually a last resort — borrowing from friends or family may hurt your pride more, but cash advances will hurt your wallet. If you have a cash advance and purchases on the same card, your payments will go towards the low-APR purchases before the high-APR cash advance, which means you’ll be paying much more interest for much longer.
7. Ignore those in-store “15% off if you sign up for our credit card” offers. Most people should follow this advice. There are a lot of pitfalls with this type of behavior. Your credit score could get dinged quite a bit, and if you plan on qualifying for a mortgage, you may get a lower rate and end up paying thousands more than you might have otherwise over the course of your entire life. Was it worth it to get a few hundred dollars off an HDTV? Maybe not. But then again, if your credit score is not a concern and you absolutely pay your bill in full every month, there is no harm in the occasional store credit card for an instant discount. You win with the discount, and the credit card company wins with a healthy interchange fee from the store.
8. Carry only one card. I can’t think of any situation in which a typical consumer will need more than one credit card in your wallet. I carry one personal card and one business card to separate my purchases, but that’s only because I pay my bills in full and I look for cash back. A “typical consumer” — one who doesn’t always pay in full — would be better off with cash or debit cards for most purchases and credit only for small emergencies.
9. If you do get into credit card debt, get help right away. AFFIL suggest starting with the Consumer Action Help Desk. The bottom line is that if you get into credit card debt, regardless of how well or strongly issuing companies market to you, you are responsible. If you have income, getting out of debt doesn’t have to be a monumental task. Simple mathematics, while also taking into consideration the motivation provided by a series of small achievements, will show you the best way to get it done.
10. Remember your other option: cash. Cash is (almost always) king. It will certainly keep you out of trouble, and as long as the money is yours, you know that you are not spending beyond your means.
Holiday Season Tips to Avoid Credit Card Traps for College Students [AFFIL]
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