For some, credit cards are synonymous with freedom. Credit cards allow people to buy the things they cannot outright afford, making them an important element of personal finance. Everyone should have a credit card, and no one should be afraid to use it to build good credit.
However, there are people who don’t use their credit cards correctly. Here are a few signs you might be misusing your credit card and putting yourself in a bad financial situation:
You Have Too Many Credit Accounts Open
It’s true that so-called “high achievers” — the rare people who have credit scores higher than 785 — have an average of seven credit cards, with a mix of open and closed accounts. However, that doesn’t mean you should feel entitled to keep seven or more credit accounts open and in use all at once. In fact, having access to a larger amount of credit might tempt you to spend more on things you don’t need, increasing your credit debt and making repaying your credit accounts all but impossible.
The number of credit accounts you should have open at one time has more to do with your spending habits and your income than with some objective, magic number. Typically, your credit score increases when you keep your balances below 30 percent of your available credit, but you should also keep in mind your ability to repay those balances on time. If you tend to use up all the balance on your credit accounts, you might limit yourself to just one (or none!) credit cards in your wallet.
You Are Only Paying the Minimum Balance Each Month
It might seem frugal to pay the minimum balance because you are paying only a small amount each month, but the truth is that paying only the minimum will kill your finances in the long run. Credit companies keep minimum payments low because they want you to accrue huge amounts of interest on your account balances. Over time, compound interest could grow larger than your initial principle, and it might become impossible to repay your debt with the minimum monthly payment alone.
Financial experts across the board advocate for paying your credit account balance in full every month, which allows you to avoid interest entirely. However, if you can’t do that, you should at least pay as much as you can beyond the minimum payment to keep your balance low.
You Aren’t Checking Your Statements
Most months, your credit statements will tell you what you spent where. The amounts will be correct, and you will pay whatever amount you can afford. However, some months, your statement could be wrong — some store could have double-charged you for a single purchase, or there might be fraudulent purchases from an identity thief. If you aren’t looking over your statements every month, though, you won’t catch these errors, and you will end up paying much more than you need to.
At the very least, you should scan your account summary and think back on this month’s purchases to be certain that nothing out of the ordinary appears on your statement. Yet, if you are truly diligent, you will save your credit card receipts and compare them to the totals on your statement. Then, if you find a discrepancy, you can call your credit provider and get it investigated before you pay.
You Stopped Trying to Pay Down Your Debt
When your credit card debts get out of control, you might think that they are a lost cause. It is common for those with high credit debts to feel overwhelmed and depressed, and attempts at paying down debt might feel futile. However, the worst thing you can do is give up on debt repayment entirely.
Instead, you should make a debt management plan. You can start by better understanding your incoming and outgoing money by using budget planning tools available online or through personal finance software. Then, you can research debt repayment strategies like the snowball or the avalanche and factor them into your greater financial plan. It might take a few years to repay credit debt, but eventually you will gain your financial freedom.
Credit cards are a serious responsibility, and you shouldn’t take using your credit card lightly. Especially if you know you already have significant credit debt, you should take a hard look at your credit habits and make changes to help you improve your financial situation and build wealth.