Strategies potentially escalating your credit card expenditures
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In today's world, credit cards have become a common financial tool, offering rewards for everyday purchases. However, it's essential to use them wisely to avoid falling into a trap of unintentional debt. Here's a breakdown of common habits that can lead to increased debt and tips on how to manage your credit card effectively.
One of the most significant pitfalls is focusing too much on rewards that rarely exceed 5 percent on certain purchases, while the average credit card interest is around 20 percent[1]. This means that making minimum payments, taking out cash advances, repeatedly transferring balances, and chasing rewards can unintentionally increase credit card debt because these behaviors often lead to higher interest charges, fees, and longer payoff times.
Making only minimum payments, for instance, covers only a small portion of the total balance, with most of what you pay going toward interest rather than reducing the principal. This causes the balance to grow over time due to compounding interest, sometimes increasing the debt even as you make payments[2][3]. For example, paying just the minimum on a $2,000 balance with 20% APR can take nearly 34 years to pay off while costing over $7,000 in interest[2].
Cash advances typically incur immediate interest charges and fees at higher rates than regular purchases, increasing debt quickly. Repeatedly transferring balances to avoid interest can generate transfer fees and might lead to a cycle of debt if new balances accrue interest elsewhere. Chasing rewards may encourage more spending and delay payments, compounding debt growth.
To avoid these traps, it's crucial to pay attention to the terms on your credit card and do the math to avoid making your card debt more expensive. Instead, aim to get a credit card that rewards your natural spending habits, rather than altering them to maximize rewards. Using a rewards credit card can be beneficial, but overspending to earn more rewards can lead to increased spending.
Don't let your credit card turn into a financial burden instead of a helpful tool by not paying attention to its terms and usage. Be careful not to overspend for the sake of extra cash back or points when using a rewards credit card. To avoid negating rewards earnings with interest charges, make sure to pay off your card balance in full each month.
Over 7 in 10 credit cardholders who carry a balance from month to month are chasing rewards, according to our website's Credit Card Rewards Survey. This highlights the importance of understanding the impact of these habits on your financial health and taking steps to manage your credit card effectively.
In conclusion, while credit card rewards can be a valuable addition to your financial strategy, it's essential to remember that they should not come at the expense of increased debt, longer repayment times, and potential damage to your credit score. By being mindful of your spending habits and carefully managing your credit card, you can enjoy the benefits of rewards while maintaining a healthy financial life.
References:
[1] LendEDU. (2021). The Average Credit Card Interest Rate in 2021. Retrieved from https://lendedu.com/blog/average-credit-card-interest-rate-in-2021/
[2] Credit Karma. (2021). How Long It Takes to Pay Off Credit Card Debt. Retrieved from https://www.creditkarma.com/advice/i/how-long-to-pay-off-credit-card-debt/
[3] Consumer Financial Protection Bureau. (2018). Credit Card Basics. Retrieved from https://www.consumerfinance.gov/about-us/blog/credit-card-basics/
[4] Experian. (2021). How Credit Utilization Affects Your Credit Scores. Retrieved from https://www.experian.co.uk/credit-education/credit-utilisation/
[5] MyFICO. (2021). How Does Credit Utilization Affect Your Credit Score? Retrieved from https://www.myfico.com/credit-education/whats-in-your-credit-score/credit-utilization
- Personally managing your finances wisely is essential to avoid accumulating unnecessary debt with credit cards, such as making only minimum payments, taking out cash advances, and chasing rewards, which can lead to higher interest charges and longer repayment periods.
- To ensure that credit card rewards supplement your financial health rather than hinder it, it's crucial to understand the terms associated with your credit card and make an informed decision based on your natural spending habits, rather than altering them to maximize rewards.
