Credit cards have become an integral part of modern financial payment, and are essential in securing a convenient line of credit, whilst providing consumers with the opportunity to improve their credit score.
However, it is important to understand the many associated pitfalls, have you made any of these ten common credit card mistakes?
1. Know your credit score
It’s important to get familiar with your credit score, as it can save you from being rejected when applying for a loan or another credit card, as well as inspire you to improve your credit rating, should it be below par. To find out more about your credit rating, or to obtain a credit report, go to www.moneysmart.gov.au
2. Shop around
Consumers looking for a credit card that best suits them should first consider their credit rating, their lifestyle and how they spend money before applying. If you plan to carry a balance, then a low interest credit card would be ideal. If you’re a frequent flyer, then it may pay to go for a card with travel rewards. People applying for the wrong type of card can often be rejected or will have to cancel it down the track – both are situations that can have a negative effect on your credit rating.
3. Use your credit cards
Some people refrain from using their credit cards for fear of accumulating debt that they may not be able to pay. However, by not using credit cards you lose the opportunity to improve your credit rating, which may make borrowing for bigger purchases in the future a little more difficult.
4. Getting greedy for rewards
Often people continue to collect cards from different banks in the pursuit of the rewards and discounts each one can provide. However, it is important to focus on managing credit card debt before worrying about your credit card rewards.
5. Don’t collect credit cards
It goes without saying, although still important to mention, that having a whole lot of credit available to you and accessing it without carefully monitoring your spending, can often lead to crippling debt down the line. That’s why it’s best to only keep a couple of credit cards – a primary card for spending and one for back up and emergencies. It also pays to use the back up card once a month, and then pay off the balance in full, to maintain a good credit rating.
6. Considering introductory rates as permanent
Often, in an attempt to lure you into applying for a card, banks will offer low or zero interest rates for a period that can range from 3 months up to a year. Remember these rates are not permanent and will change once the specified period is over. It’s advisable to pay off your outstanding balance during this period to avoid outstanding’s been charged with retroactively applied interest from the date of purchase.
7. Make timely payments
Missing the monthly due date may not seem like much of an issue, but each time you do so it damages your credit score. A well-planned budget should include credit card repayments and, if you’re likely to forget your regular monthly payment, then it may be best for you to set up a direct debit, which pays at least the minimum payment or, if you can afford it, the full balance each month.
8. Get rid of the balance
It’s not uncommon for people to think that just paying off the minimum amount each month helps their credit rating, but unfortunately that’s not the case. Paying off the balance, instead of carrying it, should always be your priority if you truly wish to have a good credit score.
9. Don’t use your credit card for cash advances
Making cash withdrawals from your credit card account is always coupled with high interest rates that begin to accrue immediately upon withdrawal. So, if you want to make a cash withdrawal, it’s best to stick to your debit card.
10. Stay in the game
If you have a bad credit rating, or have suffered damage to your credit score, it’s easy to fall into the trap of thinking you can’t dig out of your debt hole. But when it comes to credit ratings, time heals all wounds. So, instead of cancelling your cards or, worse case scenario, declaring bankruptcy, talk to your provider and get some financial advice that can help you out of your debt dilemma. Alternatively, you could seek the advice of a trusted financial planner to see what is the most effective way to repair your credit.
If you can identify with any of these common credit card mistakes, or if you need any general financial advise, get in touch with one of our Chapter Two consultants today.