Consumer credit makes buying the stuff we want and need easy and convenient. Credit can also bail us out of a jam, especially if our emergency funds aren’t quite up to the task. Unfortunately, that convenience comes at a price. Aside from uncontrolled, in-the-moment spending, credit card use opens us to a variety of dangerous financial mistakes, some with long-term effects.
You probably already understand the dangers of running up those credit card balances, but here are few more dangerous mistakes you may be making, plus some tips on how to avoid them.
1. You only pay the minimum due.
Banks use several formulas to calculate the minimum amount due each month. Most start with a percent or two of the outstanding balance and then add in any fees for late payments, exceeding the credit limit and monthly interest charges. However it’s calculated, simply paying the minimum will result in lots and lots of interest payments over time.
You can find out how your credit card issuer calculates the minimum payment by visiting your issuer’s website. Your bank’s site may also include a calculator that shows you how long you’ll owe – and how much interest you’ll pay – if you merely pay the minimum. If not, try this credit card debt calculator.
2. You pay late.
According to FICO, which generates credit scores, payment history is the largest component of a credit score – 35 percent of the score, in fact. This makes sense because lenders want to know how promptly borrowers have paid in the past, and nobody likes getting paid late. Late payments mean a lower credit score.
There’s a second danger here as well. Late payments will result in late payment fees from your bank, which not only cost you a bit more (or a lot more, depending on your agreement), but may also boost your monthly minimum (again, depending on your agreement).
Source: U.S. News & World Report |