How to Avoid These Pitfalls When Getting a Credit Card

Getting a credit card can be a great way to build credit and can help in a pinch if you need access to funds quickly, but can also bring with it several years of payments if you’re not careful. Understanding what not to do with a credit card as well as developing some basic spending habits can help your own a credit card without getting stuck with an astronomical balance.

Acquiring Debt

There are only a few situations where accruing a large amount of debt is acceptable. Usually it’s for large purchases that are considered necessities, such as a mortgage, a car within your budget, and student loans. Having a maxed-out credit card is not something you want. This is because the APR for most credit cards skyrockets after the first year, usually jumping from the 1 percent to 2 percent promotional rate up to anywhere from 15 percent to 20 percent or more. So if you have a card with $10,000 on it, you could end up spending $2,000 per year in interest alone. If you have a large purchase, like a car or school tuition, you might be better off with a loan than charging the payment. You want to prevent a situation where a creditor charges off your debt. The interest alone could end up costing you far more than you think.

Missing Payments

Missing payments on your credit card can do more than just tack a late fee onto your bill. Late payments can also increase your APR even further as well as potentially costing you any saved-up rewards if you have a rewards card. In addition to having debt, having missed payments on your credit record is a bad way to start building your credit history. Missed payments can be reported to various credit bureaus, negatively impacting your credit score.

Principal-Only Payments

If you have already accumulated a balance on your credit card, consider making principal-only payments at the end of each month. First, work out how much money you have coming in and how much of that income has to go toward bills and other necessary payments, such as gas and groceries or rent each month. If you have excess money left over at the end of each month, take a portion of that, and put it aside. At the end of each month, make a principal-only payment with a portion of your excess money. This will go directly toward knocking down the principal amount on your card’s balance as well as drop the total amount of interest you’ll need to pay off by a small amount. While it might not seem like much, over time, it adds up.

Credit cards can be great for building credit if used properly. When building credit, use them for small purchases, and pay them off immediately. Only use a credit card if you have enough money to pay it off. Simply use it as a tool to build credit, not a lifeline or source of “free money” when payday is two days away and you don’t want to wait. Large credit card balances can take years to pay off and cost you almost twice your balance in fees and interest if you pay it off by the minimum payment.

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