Credit cards can provide great perks and allow you to earn cash back or rewards for your purchases. They also serve as tools for helping you build credit, which can be important if you want to buy a house or car one day. But there are some risks involved in using credit cards, and if you’re opening a credit card for the first time, you may be nervous.
However, if you’re aware of the dangers of credit cards, you can avoid making these mistakes while using credit cards wisely and taking advantage of their perks, benefits and rewards.
If you have the wrong attitude about credit cards, it could be easy to borrow more than you can afford to pay back. A credit limit should be thought of as a loan extended to you by a credit card provider as opposed to free money to spend. Credit card balances generally come with interest rates. Every time you add to your balance and don’t pay it off in full within the billing cycle, you’ll have to pay that much more in interest. This can make it difficult to get out of credit card debt.
If your card’s credit limit is £2,000, this doesn’t mean you should plan on spending £2,000 that month unless you know you can pay off your bill in full right away.Be mindful of your spending, and make sure you’re not buying more than you can afford. Consider creating a monthly budget and figuring out how much you can afford to spend each month — and then try not to exceed this.
Missing your monthly payments
Your payment history is one of the biggest factors that contribute to your credit score, so missing payments can have a serious impact on your credit. Also, if you miss a payment, you’ll typically be charged a late fee. A penalty APR may be applied to your account as well.
One way to potentially avoid this is by setting up direct debit payments. With direct debits, you won’t have to worry about forgetting to pay your bill, but you will be responsible for ensuring there’s enough in your account when the direct debit is due.
The best way to avoid having to pay interest? Try to pay your credit card statement balance in full and on time every month.
Applying for too many new credit cards at once
You may want to avoid applying excessively for credit cards or for cards you don’t actually need. That said, you shouldn’t generally let this worry you if there’s a specific credit card you’re looking to get.
You may also want to avoid cards you’re unlikely to be approved for, because you’ll have added a hard inquiry to your credit reports without any reward.
Using too much of your credit limit
Your credit scores can be negatively affected if you have a high credit card utilisation ratio. Credit card utilisation ratio refers to how much of your available credit limit you’re using.
A good rule of thumb is to keep your credit utilisation under 30 percent. If your credit utilisation ratio is currently higher than you’d like, consider asking your credit card provider for a credit limit increase (which is at your provider’s discretion and may involve them making a hard inquiry if they check your credit). Or if at all possible, try to limit your spending by budgeting. If you’re carrying credit card debt, paying it off will also reduce your credit utilisation ratio.
It is worth noting the rapid growth in personal borrowing on credit cards, loans and car finance, is now rising at almost five times the rate of growth in UK pay. Households are finding themselves increasingly squeezed by meagre earnings growth and rising inflation, as the weak pound after the Brexit vote pushes up the cost of imported goods.
Though there are dangers associated with using credit cards, you can minimise their impact by following some basic principles. As with using any form of credit, it’s best to avoid complacency and maintain a sense of discipline — you might find a little can go a long way for your credit scores.