5 costly credit card mistakes
Your credit card makes life so much easier, but don’t fall into these traps.
Managing your credit card can teach you valuable household finance lessons. Perhaps the most important lesson is managing your finances properly costs you less in the long run.
Credit card newbies are often starstruck by the possibilities of the ‘magic plastic’. But the secret to owning a credit card is knowing when you should use it, and why you should avoid the following mistakes:
1. Missing payments
The biggest mistake you can make on your credit card is to pay late or miss a payment. This is a golden rule that applies to all your accounts. If you don’t follow this rule, you can seriously damage your credit score and possibly hurt your chances of getting a loan when you need it most.
Apart from this long-term effect, you’ll immediately lose a few extra rand because you’ll be charged a penalty fee. Worst of all, you’ll end up paying more interest if you don’t make up for the missed payment. Interest is calculated on the outstanding amount so, for as long as an amount that should have been paid off is still part of your balance, you’re racking up more interest than you should be.
2. Paying only the minimum
Whenever you can, pay back the full amount you owe every month. This may seem impossible, but you win in 2 ways if you manage to do this. Firstly, you don’t pay interest if you settle the amount you borrowed within 55 days. Secondly, if you’re using your card in this way, then it means you’re getting better at managing your household finances.
If you can’t afford to pay back the full amount, then it’s still worth paying more than the minimum amount due or making extra payments when you have cash available. As shown above, the faster you reduce the outstanding balance, the more you reduce the total amount of interest that you pay.
3. ‘Maxing out’ your card
Sure, it happens. On rare occasions, you may find you’ve used up all your available credit on the card. The best way to claw your way back is to stop spending on that card completely until you have made enough monthly payments to return the balance to acceptable levels.
A credit card is often used as a simple way to start building a credit record
It’s bad to use up all the credit on your credit card for 2 reasons: firstly, when your statement is issued, that month’s interest and other charges are added to your balance. If your card is already maxed out, these charges push your balance over your credit limit, which can result in penalty fees.
Secondly, maxing out a card can have a long-term consequence – affecting your credit score. Credit agencies look closely at all your debt and how you manage it. One of the factors they consider is how much of your debt you’ve used up. A rule of thumb is to try not to use more than 30% of the credit you have available on your card. Using more than this could decrease your credit score because of the fear that you won’t be able to keep up with monthly repayments.
4. Having too many cards
Having a fat pack of credit and store cards may be good for bragging rights, but it’s not always a good idea. You’re paying admin fees on every card you have, so that’s another expense that may not be worth the benefits you’re getting from it.
But more importantly, too many cards and store accounts can also be bad for your credit profile. The reason – as with a maxed-out card – is that you might struggle to make your monthly repayments. You also run the risk of a lower credit score if you apply for several credit cards in a short period of time. Again, the thinking is that you might have trouble repaying them all.
5. Cancelling all your cards
Having read all the above, you might be tempted to pay off all your credit cards then cancel the lot of them to ‘avoid temptation’. But that could be a mistake, too. A credit card is often used as a simple way to start building a credit record. This is a solid plan that helps you establish a history of making repayments on time. For this reason, especially if you’ve had a card for at least a year, it makes sense to hang onto your card. Even if you don’t use it often, or use the card and repay the full amount every month, this record of regular payments helps boost your credit score.
It also shows lenders that you can be trusted the next time you apply for a credit card or loan. So, if you have too many cards, or too much debt on a card, you may want to make a plan to get your debt down to 30% of your credit limit. Then pay off and close the cards with the highest interest rates, or those you don’t use often. But consider keeping at least 1 credit card account open. It offers immediate funding in an emergency, convenient and secure payments both in-store and online, and if you use it responsibly, it helps you qualify for other credit products.
