The road to a credit card debt pileup is often paved with spending that seemed like a good idea at the time. But too many well-intended moves can lead you into a financial ditch and ruin your credit.
Joseph Birkofer, principal and founder of Legacy Asset Management in Houston, says the problem starts with forgetting that credit is not free money, but a loan. To avoid that trap, he suggests mentally substituting another term for "credit" that seems a little less positive.
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"'Credit' is a good word: I'm giving you credit for that great idea. I got extra credit for that term paper," Birkofer says. "People should kind of thumbtack it to their foreheads, so to speak, that this is not a 'good' card, it's a borrowing card."
Here's how to talk yourself out of some of the worst credit card moves.
Substituting credit for cash
The rationale: You're between paychecks -- or jobs -- and your cash flow is clogged. Or maybe you just prefer the convenience of whipping out the plastic.
The rebuttal: Form a habit of making everyday purchases like groceries, gasoline and restaurant meals on credit, and you could still be paying off those debts long after you've consumed the goods. It's one of the top credit card blunders on consumer credit counselor Lisa Ray's list.
Ray, a former financial education specialist for the Consumer Credit Counseling Service of Greater Atlanta, now known as Clearpoint, suggests using a debit card instead if convenience is your goal, but make sure you keep up with your spending.
"It doesn't help to use the debit card if you end up getting overage fees because you're not tracking your purchases," Ray says.
Other experts say that if you're constantly using credit cards because you find yourself low on cash, it's time to make some lifestyle changes.
Making only the minimum payment
The rationale: As long as you don't have to pay more, you'd rather save those extra bucks.
The rebuttal: By paying only the minimum on your credit card bill, you're incurring much higher finance charges and increasing the real cost of whatever you purchased exponentially.
Say you have a $4,000 balance on a card that requires a minimum payment of 2 percent, and your interest rate is 18 percent. It would take you 428 months (that's almost 36 years!) and $10,397.20 in interest to pay off that debt. But if you added just $20 more to that minimum and committed to making fixed payments of $100 a month, the balance would be gone in 62 months and the interest shaved down to $2,154.49.
Bankrate's credit card calculator computes the payment schedule when you plug in your own real numbers.
Waiting too late to make a payment
The rationale: Because you can pay your bill with a few computer clicks, you figure you have plenty of time.
The rebuttal: Failure to factor in enough time for account processing (and mailing, if you take the snail mail route) when paying your credit card bill can be disastrous, Ray says.
Credit reports indicate late payments in 30-day increments, so any payment overdue by 30 days or fewer counts as 30 days late. The penalty for that mark against you can be a late fee, a bumped up interest rate and a lower credit score. In fact, your payment history accounts for about 35% of your credit score.
Paying online is more foolproof than using old-fashioned snail mail. You get confirmation of your payment when you submit it and at the same time the credit card company tells you how long it will take to process it.
Taking a cash advance
The rationale: An emergency comes up or a big bill comes due, but you don't have enough in your bank account to cover it so you get a cash advance.
The rebuttal: Tapping into cash available through your credit card to get out of a financial jam will cost you dearly. You'll probably incur an interest rate that's several points higher than your normal rate for purchases. On top of that, there's a transaction fee that's typically 2%-4% of the advance, a flat fee, or some combination of the 2. There's also no grace period for cash advances, so you get hit with interest charges immediately.
Consider asking your creditor for an extension, getting a loan from a family member or even putting the bill payment on your credit card (but pay it off in full when you get your statement). Use the card to get cash only as a last resort.
"I think cash advances are a reasonable thing in an emergency," Birkofer says. "But a cash advance to pay your rent tells me that you're not managing your cash right. There's something out of whack with either your income or expenses."
Closing your account
The rationale: You've finally paid off a card with a high interest rate and are determined to rid yourself of that relationship for good.
The rebuttal: While it may feel good to close your account and put the card in the shredder, doing so could actually have a negative impact on your credit score. By closing the account, you reduce your available credit line, which increases your ratio of debt-to-available credit. Instead, keep the account open but keep the card out of sight. Ray suggests putting this "emergencies only" card in a safety-deposit box at your bank or in your freezer at home.
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