credit card advice
The credit card is powerful tool that allows us to buy things we might not be able to afford and then hold off payments until we can afford it. Its combination of power and convenience should not be taken likely.
I am sure many of you own, use, love and hate your credit card. My life was changed years ago when I found I owed credit card companies more than $50,000.
Yes, that number is correct. I had lived my life in the fast lane with little to no worries in the world. I was under the powerful control of my credit cards and their banking issuers. It was a scary place to be.
Realizing I was going nowhere fast financially, I decided to make a change.
I bootstrapped myself along for four years while paying off those credit cards and finally hit the milestone in 2012. Credit card debt freedom!
It took me a little less than four years to pay off my $50,000 credit card debt, but it was liberating to say the least. I want to share the two biggest credit card mistakes people make — mistakes I myself am guilty of.
1. Not paying off your credit card balance every month
You do not have to pay off the card each month, right? Well, technically that is true. Credit card companies allow you to float balances over each and every month, although at a cost.
Credit card companies will not let you hold on to a balance, unless it is a promotional deal, without making you pay the price. They do this in the form of interest rates.
Did you know your interest rate does not matter if you pay off your credit card balance each and every month?
You could have a 29.99 percent APR, but it wouldn’t matter if you paid off your balance each month — the credit card company wouldn’t charge interest interest in this scenario.
Check out our selection of awesome low APR credit cards to avoid that hassle altogether.
However, most people do not pay off their balances each month. They use their cards to buy things they can’t afford but have every intention of paying off their balances.
I used to be in that situation. I had a certain rationale about making the purchase, but would never pay off the balance.
I paid large amounts of money in interest over the years — money that went directly to the bank. It’s disappointing to think about it now.
If you want to avoid paying interest, use your card only for purchasing things you can afford. I currently use my credit card for every purchase I make, but they are only purchases I would normally make with my debit card.
Are you wondering why I do this? I use my credit card for each purchase so I can get rewards.
This plan does not work for everyone, and I would not suggest trying it unless you can handle your spending. This spending plan will ensure you do not carry a balance.
2. Paying only the minimum payment
This mistake happens when you don’t pay off your balance every month. You know all too well about the minimum payment. I am sure you see it each time you open up your credit card statement.
The minimum payment is the smallest amount the credit card company will allow you to pay each month without pushing you into default.
Each credit card company calculates it differently, but a general rule is two to four percent of your balance.
If you pay just the minimum every month, you could be stuck paying thousands of dollars in interest you could’ve avoided if you put more towards your balance every month.
We will break that down using a little math:
For example, you owe $1,000 on your credit card. That balance is not extremely high, but it is still more than $0.
Assuming the card issuer uses a 2 percent rate, we will calculate your minimum payment. It would break down like this: $1,000 x 0.02 = $20
This shows your minimum payment would be $20. Not bad, right? You can spend $1,000 and you only have to pay back $20 each month. It seems like an awesome deal, but you’re only getting a portion of the story.
This calculation just shows you have to pay $20 minimum, but it does not show you how much of that payment goes to interest.
In this example, pretend you have an interest rate of 14 percent. We will need to divide your interest rate by 12 months and then multiply it by your balance.
Here is what it looks like: .14/12 x $1,000 = $11.67
This example shows you if you are only making the minimum payment on your credit card balance, then out of the $20, $11.67 is going toward your interest payment. This leaves only $8.33 to going toward your principle.
You are really bringing down your balance by only $8.33 each month and then just giving the bank $11.67 of the money you work hard for each month.
Do you want to know how long it will take you to pay off that $1,000 balance if you only pay the minimum payment? 73 months!
The $1,000 balance we mentioned in the example would take you 73 months (6.08 years) to pay off. That example assumes you are not adding any more money to that balance. Now you see why credit card companies love when you keep a balance.
Over the six years that you pay on the debt, you will be giving the credit card company $851.91. Instead of just paying the $1,000 you owed at the end of the month, you end up paying $1,851.91.
There is nothing fun about that. That is the cost of borrowing money.
Always make sure to pay more than the minimum payment. If you pay more than the minimum payment, you will pay off the debt quicker and be happier about your decision.
By adding an extra $10 a month toward your payment, it will bring your payoff time to 42 months. It is surprising what a difference $10 makes.
There are many other mistakes people make with their credit cards, but I think these two are the worst. These mistakes will end up costing you a lot of money. Continue making these mistakes if you like padding the pockets of the bank.
If you like keeping the money you worked hard for and you enjoy having your money make money for you, take steps to getting your finances in order. Your future self will be glad you made the decision to change!