Perhaps you’ve heard horror stories of credit card debt and ruined credit scores.
Credit cards can provide great perks and allow you to earn cash back or rewards for your purchases. They also serve as tools for helping you build credit, which can be important if you want to buy a house or car one day.
But there are some risks involved in using credit cards, and if you’re opening a credit card for the first time, you may be nervous.
But if you’re aware of the dangers of credit cards, you can avoid making these mistakes while using credit cards wisely and taking advantage of their perks, benefits and rewards.
Below we’ve listed five risks of credit cards, as well as tips on how to manage them.
- Getting into credit card debt
- Missing your credit card payments
- Carrying a balance and incurring heavy interest charges
- Applying for too many new credit cards at once
- Using too much of your credit limit
If you have the wrong attitude about credit cards, it could be easy to borrow more than you can afford to pay back. A credit limit should be thought of as a loan extended to you by a credit card provider as opposed to free money to spend. Credit card balances generally come with interest rates. Every time you add to your balance and don’t pay it off in full within the billing cycle, you’ll have to pay that much more in interest. This can make it difficult to get out of credit card debt.
Here’s how to think about it: If your card’s credit limit is $2,000, this doesn’t mean you should plan on spending $2,000 that month unless you know you can pay off your bill in full right away.
The takeaway? Be mindful of your spending, and make sure you’re not buying more than you can afford. Consider creating a monthly budget and figuring out how much you can afford to spend each month — and then try not to exceed this.
There are several apps and tools that can help you track your spending. Or if you’re more of a do-it-yourself type, there’s the option of creating a simple spreadsheet or list of your monthly expenses.
Your payment history is one of the biggest factors that contribute to your credit scores, so missing payments can have a serious impact on your credit.
Also, if you miss a payment, you’ll typically be charged a late fee. A penalty APR may be applied to your account as well.
Your late payment may be reported to the three major consumer credit bureaus if it’s more than 30 days late, and it may stay on your credit reports for up to seven years.
One way to potentially avoid this is by setting up automatic payments. With autopay, you won’t have to worry about forgetting to pay your bill, but you will be responsible for ensuring there’s enough in your account when the automatic payment is withdrawn.
You could also set up text or email reminders for when your monthly bill is almost due to make sure you pay on time.
If you carry a balance over to the next month, you could end up paying a significant amount of interest. Credit card interest rates can vary depending on the card and your credit health, but they can run high.
As of January 2018, the average credit card annual percentage rate, or APR, was 16.32%. But if you have average or poor credit, you’ll likely pay an even higher rate.
If you’re carrying a high balance and having trouble paying it down, one option you may consider is applying for a balance transfer card. Some balance transfer cards offer a 0% introductory rate during a period of anywhere between nine and 21 months, meaning you won’t pay interest on your balance during that time.
The best way to avoid having to pay interest? Try to pay your credit card statement balance in full and on time every month.
When you apply for a credit card, you generally get a hard inquiry. This means that a credit card issuer checks your credit, and this check can subsequently show up on your credit reports.
A hard inquiry can lower your credit scores by a few points, but the effect of each individual check can decrease or even disappears over time.
You may want to avoid applying excessively for credit cards or for cards you don’t actually need. That said, you shouldn’t generally let this worry you if there’s a specific credit card you’re looking to get.
You may also want to avoid cards you’re unlikely to be approved for, because you’ll have added a hard inquiry to your credit reports without any reward. Credit Karma Approval Odds compares your credit profile to the credit profiles of other members who were approved for the card to assess the likelihood you’ll be approved, so consider checking this through your Credit Karma account before applying for a card.
Your credit scores can be negatively affected if you have a high credit card utilization ratio. Credit card utilization ratio refers to how much of your available credit limit you’re using.
Utilization ratio is an important indicator of lending risk. Creditors believe that when you reach or exceed your credit limit, you are more likely to have trouble repaying the money than would someone with a lower utilization ratio, which makes you more of a risk to credit issuers. If you’re perceived as a riskier bet, credit issuers are less likely to approve a new credit for you and the credit you do receive will likely come with higher interest rates.
A good rule of thumb is to keep your credit utilization under 30%. If your credit utilization ratio is currently higher than you’d like, consider asking your credit card issuer for a credit limit increase (which is at your issuer’s discretion and may involve it making a hard inquiry if it checks your credit). Or if at all possible, try to limit your spending by budgeting. If you’re carrying credit card debt, paying it off will also reduce your credit utilization ratio.Get tips for asking for a higher credit limit
Though there are dangers associated with using credit cards, you can minimize their impact by following some basic principles. As with using any form of credit, it’s best to avoid complacency and maintain a sense of discipline — you might find a little can go a long way for your credit scores.