When used properly, credit cards can provide substantial benefits. Unfortunately, using credit cards the right way is often a difficult task. There are hundreds of pitfalls that can turn just about any credit card into a financial black-hole that can be difficult to escape. Here are three of these situations that can create major problems:
1.) Cash Advances: Without question, the worst thing you can do with your credit card is use it for cash advances. Not only do these transactions incur a 4-5% upfront fee, they are subject to interest rates in the low to mid 20 percent range, even if your regular interest rate is only 10-12%.
Cash advances are especially tricky for people who only pay the minimum and already have credit card debt. Why? Credit card companies can use your entire minimum payment to reduce the portion of your credit card balance with the lowest interest rate. Thus, if you owe $1,000 at a 12% rate and $1,000 at a 21% cash advance rate, your entire minimum payment will reduce your low interest balance, leaving you with high interest debt it can take years to repay.
Solution #1: Don’t use your credit card for cash advances-ever!
Solution #2: Make large payments as soon as possible to eliminate the cash advance portion of your credit card debt.
Solution #3: If solutions one and two aren’t feasible, get a 0% balance transfer credit card. While you will have to pay a 3-5% balance transfer fee upfront, these cards can provide you with anywhere from a year to 21 months to repay your debt without any new interest piling up.
2.) New Credit Card Mania: When I was a college student, every time I got a new credit card or a credit limit increase, I spent it as if it were cash and not a high interest loan. I think it took me four years to repay the bar tabs and other expenses I recklessly charged as a college student and the only reason I faced up to this debt was the fact that I maxed out all my cards and couldn’t get any new ones. While I was particularly irresponsible, I’m sure I’m not the only person who has succumbed to new credit mania.
Solution #1: Unless you are in a dire financial situation where you are relying on credit to survive, re-evaluate your spending habits. You may find that you are simply living above your means and it is time to cut back on frivolous expenses.
Solution #2: If, after realizing you are in fact living above your means but can’t cut back, then it may be time to cut up your credit cards.
3.) 0% Credit Card Addiction: 0% credit card addition is similar to new credit card mania, only more strategic. This pitfall tends to impact people who take advantage of low interest balance transfers but, rather than using the 0% period to reduce credit card debt, turn around and rack up more debt. Some people utilize 0% rates for years, transferring balances from one card to another until the day they find themselves maxed out and unable to secure a new 0% credit card.
Solution #1: Don’t use credit card balance transfer offers to defer interest; use these offers to reduce your debt.
Solution #2: Don’t be ashamed if you have to use credit counseling. Legitimate non-profit credit counselors such as those that can be found on www.NFCC.org will work with your credit card companies to reduce your interest rates and develop a strategy to get you out of debt.
Final Thoughts: While getting into credit card trouble isn’t very difficult, it can take years to get out of credit card debt. Using cash advances, overspending, and abusing 0% credit cards are just a few of the many ways your credit cards can turn into a financial nightmare. Avoiding these three pitfalls can help credit card problems from spiraling out of control, but in the end, the only way to avoid credit card problems is to live within your means.
About the Author: Jeffrey Weber is a six year veteran of the credit card industry and President of Credit Card Depot Inc. He is an active blogger and former contributor to the Forbes MoneyBuilder blog. For additional information and to learn more about balance transfers, visit www.smartbalancetransfers.com/blog.