Like cell phones, the internet, and SMS messaging, credit cards have become a modern-day convenience which most of us take for granted. But while plastic reigns supreme as the preferred currency of the 21st century, most of us tend to overlook one simple truth about credit cards: Unlike cold, hard cash, credit cards are not a neutral payment form, but rather a payment service, which can be a very costly if we’re not careful. Whether you’re new to credit cards or a seasoned pro, here are the five most important things to know about credit cards to avoid their pitfalls.
1. It’s easy to fool yourself. With credit cards, you can charge now and pay up to 30 days later. What’s not to like?
Nothing, according to most people. As a result, most of us charge away and end up spending an average 12-18% more when we use credit cards instead of cash, according to studies.
When paying with cash, you feel the pain of the money leaving you. Not so with credit cards. It’s all too easy to fool yourself and feel like you’re not really spending money. Unfortunately, you are. That credit card bill always comes due at the end of the month.
To avoid this pitfall, learn to recognize the credit card habits that make you spend more. Make it a practice to put money aside after each charge to pay the credit card bill at the end of the month. Otherwise, you’ll easily end up trapped in a stranglehold of high interest credit card debt.
2. What you don’t know will cost you. How hard can it be? You swipe the card, pay the bill at the end of the month (or some of it), and that’s all there is to using credit cards, right? Well, yes, if you want to put a lot of money in the pockets of credit card companies.
When it comes to credit cards, what you don’t know will cost you. For each of your credit cards, you need to know the basics:
- What is the purchase APR and the cash advance APR?
- What is the APR on balance transfers?
- Is the APR fixed?
- How long is your credit card’s grace period?
- What are the fees for late and over-the-limit payments?
- Is there an annual fee?
- And most importantly, for a card with your APR, what are the consequences of paying only the minimum monthly payments?
If you already know the answer to these questions, give yourself a pat on the back. If not, reading up on your credit card terms might save you a lot of money by stopping some of the most common credit card leaks.
3. The bear traps have real teeth. How about it? Those nice credit card companies want to give you a 0% APR balance transfer. And it’s not even your birthday.
Sorry, Toto, you’re not in Kansas anymore, and the lunch is not free. Those little convenience checks with tempting balance transfer offers that card issuers send out come with all sorts of traps. Don’t get us wrong, balance transfer offers can be great. However, if you want to take advantage of a balance transfer, educate yourself on the common pitfalls of balance transfers. If not, you could end up paying 24.99% to 31.99% APR on that wonderful little loan.
4. There is only one way to win in the credit card game. Credit cards are a game of cat and mouse. Card issuers extend an incredible service-where else could you turn to get an interest free loan for 20-30 days, no questions asked?
Card issuers can extend this service in part because most people end up carrying their credit card balance longer than the interest-free grace period. As a result, card issuers end up earning interest on the outstanding balance to the tune of a sweet 9.99% to 24.99% APR.
The only way to win at the credit card game is to pay off your card balance in full every month. When you do this, you get all the benefits of credit cards, including any rewards your card may offer. And you never pay a penny for it (unless of course your card comes with an annual fee, in which case it’s time to apply for another credit card).
5. Someone Is Watching Over You. And unfortunately, it’s not God. When you use credit cards, your every move is being followed. Credit card companies share the data of your credit card use with the three credit rating agencies: Experian, Equifax, and TransUnion. They monitor how you use your card, how high a balance you keep on your credit cards, how regular you are with your credit card payments, and so on.
All that information gets aggregated (along with any other information available about your credit behavior) to create your credit report. Your credit report is available to anyone willing to pay for it, including potential employers and landlords.
In short, be sure to use your credit cards to boost your credit score rather than damaging it. Follow model credit card practices: always pay on time, keep your balances low, and keep your credit cards for a long time.
