Credit is power. Borrowed power yes, but it is still power. Just think about this – every credit card you’re carrying now has a balance that’s 3X to 4X your monthly income! Well… unless you’re carrying this baby, which comes with no pre-set spending limit.
Of course, if you abuse the spending power that credit cards give you – you’re going to be in a world of financial pain. And if there’s one kind of debt you should avoid at all cost, it’s credit card debt!
For some people, getting a credit card in the first place was their biggest credit card mistake. But you’re not going to be in that category – because you’re going to read this article about the 3 credit card mistakes you should avoid (because you know you don’t want a lifetime of credit card debt):
1. Thinking That Credit is “Your” Money
Whenever you reach into your wallet or purse to pay for something, what do you reach for first to pay for it? Is it your credit card? Is it always your credit card?
Yes, there are times when using a credit card is smart such as getting discounts or earning points for your rewards programmes. But if you’re using your credit card all of the time instead of cash or your debit card – that’s a huge mistake that can set you on the path to racking up some serious credit card debt.
Before you reach for your wallet or purse next time, think about this – your cash = your money, your debit card = your money and your credit cards = NOT your money.
Not only is it NOT your money, but it comes with a pretty high interest rate as well – 24%+, which will make rollover balances grow faster than . So before you reach for your credit card first to buy something, think about whether you have enough to buy it with YOUR money first!
2. Financing Extremely Big Purchases with Credit
It’s pretty easy to spend “somebody else’s money” right? All you have to do is swipe and go. Seriously, you can just walk into any store, purchase hundreds of dollars’ worth of merchandise and go in a matter of minutes.
The sad thing is that you can do the same with BIG purchases just as easily. But what people fail to realise is that carrying a huge credit card balance at 24%+ is like walking around with financial ball-and-chain around your ankle for a few years.
Here are some big purchases you should absolutely avoid putting on your credit card(s):
- An Expensive Holiday: Yes, you probably deserve a holiday for your hard work. But you should never pay for your whole holiday on credit. Once you see the bill and how long it’ll take you to pay it off upon on your return, you’ll probably have to skip holidays for a few years. Besides, if you want to borrow some money for a holiday, you’re better off taking a personal loan instead.
- Tuition Fees (Higher Education): Whether you’re paying for your child’s tuition fees or your own, the last thing you want is to put a huge balance on your card that’ll take years to pay back! If you want to borrow, it’s cheaper just to take out an education loan.
- Major Down Payments: Your desire to get behind the seat of a new car or get the keys to your first property could leave you with a bill that you’ll end up paying well after your car has been scrapped and your home loan has been refinanced a few times. If you’re resorting to credit to make a down payment, you’re probably not ready for the purchase anyway.
The same goes for medical bills, your wedding, or any other big purchase over $5,000. You wouldn’t take out a loan on a BIG purchase if you had to pay a 24%+ interest rate right? Unless you are ready to repay the expenditure reasonably soon, that compounding interest is going to kill you.
3. Having a High Credit Utilisation Ratio
If you make credit mistakes #1 and #2 – you’re bound to end up with a high credit utilisation ratio. What is your credit utilisation ratio? Simple, it’s the ratio of your credit card balance(s) to your credit card limit(s).
If your credit card has a credit limit of $20,000 and you use $15,000 of it to purchase 3,000 copies of Sun Ho’s album “China Wine”, your credit utilisation ratio would be 75% ($15,000 credit card balance / $20,000 credit card limit).
This is important because the higher your credit utilisation ratio is, the more you’ll scare the credit bureau into lowering your credit rating. And when the credit bureau gets scared, lenders get scared. And when lenders get scared, you end up with higher interest rates on loans.
The only way to get your credit score back up is to reduce your balance(s) to a reasonable credit utilisation ratio (at least below 30%).