Like so many other powerful tools, credit must be used carefully, lest it cause considerable damage to your financial well-being. Given your finances play a significant role in determining the overall quality of your life, using credit wisely is important to maintaining a solid reputation in a wide range of areas. Taking note of these credit mistakes to avoid will help you do just that.
Making Minimum Credit Card Payments
That minimum payment amount looks so enticingly low on your credit card statement each month. Far too many people see it and think; “That’s all they want? OK, fine.”
However, the reality is exactly the opposite.
Credit card minimum payments are calculated to keep you indebted and paying interest charges for as long as legally possible. According to Marketwatch, a $2,000 credit card balance carrying an 18% annual rate, with a minimum payment of 2% of the balance would take just over 30 years to pay off. What’s more, it’d cost you a total of $4,931, more than double the principal amount.
Carrying a Balance From Month to Month
The noted physicist Albert Einstein, considered by many to possess one of the finest minds in human history, is quoted as having called compound interest humankind’s greatest invention. Benjamin Franklin is reputed to have said, “Money makes money. And the money that money makes, makes money."
Both men were referring to the fact that compound interest can make a small amount of money huge, which is both a good and a bad thing, depending upon which side of the transaction affects you.
It’s a real problem when it’s working against you the way it does when you carry a balance on a credit card account from month to month. Interest charges are added to the balance from the previous month, which increases the amount you owe, upon which interest will be charged again. Simply put, you’ll pay interest on the interest charges and it will continue unabated, with the interest demanding more interest payments every month until the balance is paid off.
This gets a whole lot of people in trouble with credit card debt. Expanding logarithmically, the obligation gets out of hand almost before they realize it. In a lot of cases, when you can’t afford to pay more, the only way to get it to stop is a debt relief settlement in which you negotiate interest and fee waivers.
Failing to Review Billing Statements
It’s entirely possible for a merchant to charge you for something you did not buy and have it go completely unnoticed. After all, it’s easy to overlook a slight balance increase if you’re already carrying a balance from month to month (which, as we said above, is a bad idea).
Further, a lot of credit fraudsters start out with small charges to see if they’ll be noticed. They’ll go for the big score when they aren’t and wipe out your credit card completely. Reviewing your statements regularly is the best way to ensure every charge listed is one you incurred.
Failing to Review Credit Reports
It’s also possible for someone to usurp your entire identity and go on a spending spree with credit cards you didn't know you had. All they have to do is get access to your Social Security number and your date of birth to apply for credit in your name.
Those accounts will appear on your credit report, but how will you know if you aren’t reviewing it? Happily, you can get a free copy of each of your three credit reports free of charge each year at AnnualCreditReport.com.
These are four of the biggest credit mistakes to avoid. However, there are a number of others to consider. The Consumer Financial Protection Bureau offers a comprehensive list at its website, do your pocket a favor and check it out.