If you’re a young adult, chances are good that your parents have had a sit down with you to discuss the vital importance of building a strong credit score.
Credit history – positive credit history specifically- helps a person secure leases on an apartment, get a loan to buy a brand-new car or lease one, and credit history allows you to make a bid on your starter home or dream home.
One of the best ways to create a rock-solid credit score is to take out a credit card and use it responsibly over a long period of time. Credit cards make building good credit history quite easy because credit cards work by a credit card company repeatedly offering users a small loan via available credit with the agreement that the user will pay back that loan via a monthly payment.
However, it is important to know that owning a credit card can very easily become a double-edged sword.
Credit cards can really hurt their owners because getting into credit card debt is deceptively easy to do.
In fact, over a quarter of American households carry credit card debt from month to month, and the average credit card balance in America is $6,375. If you combine everyone in America’s credit card debt into a total number, you’d have over $1 trillion worth of credit card debt. So, if carrying around credit card debt is so bad, how do so many people find themselves dealing with it? Find out that and more by reading on.
Interest makes it hard to pay off your balance
The best way to avoid getting into credit card debt is to pay off your credit card balance in full each month.
Shockingly, however, just over a quarter of cardholders do that each month according to research. The reason why interest makes it harder to pay off your balance, is because you are going to have to pay interest on whatever is left in your balance. That number might be small at the onset, but it will grow steadily until you’ve got a balance that you simply cannot handle or control.
The best way to avoid this fate is to simply pay your whole balance each month. If this is impossible one month, pay off what you can and budget for next month so that you can ensure that you will be paying off next month’s balance in full, plus any interest you accrued from not paying your balance in full the previous month.
It’s easy to spend past your budget
If you’ve ever had a credit card, you know that there comes a fairly palpable temptation to spend beyond your means.
In fact, studies show that people spend more when they’re paying with credit cards than when they’re paying with cash. One study even showed that consumers are willing to pay as much as double the amount when using a credit card compared to when using cash.
The reason why this might be is because of a number of reasons. Swiping your credit card is easy, convenient, and honestly, fun. It’s easy to convince yourself that because you’re putting something on your credit card, that it’s “free” money, and you don’t get the full weight of spending the money that you get when you pay in cash.
The best way to avoid it is to put a personal limit on your card. Keep track on how much you’re spending per month and do the math to figure out how much you can afford, too. It might make spending a little less fun, but it’s really quite important.
It can be difficult to track your spending
Swiping your credit card to purchase a delicious meal or a brand now pair of shoes is one thing, logging on to check your credit card balance on a regular basis is something very different.
Though it may be painful, it is important to track spending on a regular basis. Either install your credit card’s app to make logging in and checking out your account easy. Or get a financial management tool such as Mint to even further keep your budget in mind.
Tracking your spending is a key component to a happy and healthy financial life. Because of that, it’s important to know that having a credit card, and especially have multiple credit cards, can make tracking your spending quite difficult. Not being able to accurately track your spending when using multiple credit cards plays into the magical “free” money thinking, and makes it much easier to overspend.
Minimum payments will quickly come back to bite you
While you now know that it’s important to pay off all or as much of your monthly balance as possible, many people will simply pay the minimum amount per month to avoid extra fees.
Only paying off the minimum payment of your credit card balance is a really easy way to both buy into the magical thinking related to “free” money, and get into the debt fast. Card issuers only require a small payment each month to void late fees and to keep your account in good standing.
It’s important to remember to always pay more than the minimum payment each month. Even if you can’t pay your balance in full, it is always wise to pay as much as you can. That will keep your balance relatively low and reduce the amount of interest you accrue over time.
Credit cards can actually ruin your credit score
Remember when you were told that having a credit card was crucial to building a good credit score so that you can get a personal loan or mortgage in the future?
Well, if you missed the second part of that conversation it was probably something about how they can only help you build credit if you use a credit card responsibly.
If you use your card irresponsibly, like miss a payment for more than 30 days, your credit score will take a serious hit.
The best way to avoid hurting your credit score is to keep your balance below 30% of your credit limit, pay your card on time, and minimize the number of credit cards you apply for.
Debt can cripple you for years
This is important for every adult to know.
The most dangerous part of owning a credit card, and something that can quickly snowball out of control is the amount of debt you can carry on your credit card. Any time you borrow money, you’re creating debt. The more you borrow without repaying, the further into debt you go. Debt won’t only impact your wallet, it’s been proven to be able to cause anxiety, depression, and more.
Once you find yourself in debt, it can be very hard to get out of as you make payments, but watch your balance barely shrink due to interest rates. Struggling with debt may force you to put off other payments, miss a vacation, stay with a job you hate, and much more, simply because you can’t afford to miss a payment.
The biggest clue that you might be headed towards debt is if you are unable to pay your credit card balance in full each month. It can snowball quite quickly, so if you fail to pay your credit card in full for even one month, make sure to track your spending so that you can pay your next balance in full. Stop using your cards and focus on living within your means. If you are able to stay responsible, stay smart, and keep track of your spending, you could be well on your way to building great credit and making your credit cards work for you, rather than the other way around.