Are you at risk of damaging your finances with the use of your credit card?
- Credit cards can be used responsibly or in a way that harms your finances.
- The incorrect use of credit cards can have long-term financial consequences.
- Paying interest is just one of several ways credit cards can make you poorer.
Credit cards can be a great financial tool to help you improve your finances, under the right circumstances. Unfortunately, if you make mistakes with your cards or use them the wrong way, they could actually make you poorer.
Here are four possible ways credit cards can make your financial situation worse.
1. You could get stuck paying high interest rates
Credit card interest rates tend to be quite high. In fact, it is not uncommon for cardholders to owe interest at a rate of 17% or more. If you don’t have a balance, these high rates don’t matter and you can take advantage of credit card rewards without paying any interest.
But as soon as you leave part of your statement balance unpaid, your card issuer will start charging you. Interest costs can add up to thousands of dollars over time, especially if you only make minimum payments and get stuck paying interest for years.
The interest costs you pay could end up adding up to more than the original amount of your purchase, which could leave you considerably poorer as you end up paying multiple times for everything you charged.
2. You could immobilize your money due to monthly payments
Once you start carrying a credit card balance, it can be difficult and expensive to pay off. As long as you have that balance, you will owe a monthly payment to your creditors. That payment will eat up the income you haven’t earned yet.
Since you’ll have to spend part of your future paychecks each month paying off your old credit card balance, you’ll have less money left over. You may find it more difficult to cover your costs without taking on more debt, and you may not have any extra money left over to invest or save for important financial goals, as it will all go to creditors for past purchases.
All of this can make your financial situation worse by reducing your net worth and keeping you from investing for your future.
3. You could get late fees or over-the-limit fees
If you load too much on your card and go over the limit, your card issuer will likely charge you a fee. You could also end up owing fees if you are late on a payment. And, in some cases, violating the cardholder agreement could trigger a higher penalty APR that makes your debt even more expensive.
Any additional fees or interest costs you pay because of these credit card errors will leave you with less money for other things.
4. It could hurt your credit score
Maxing out your credit card, using more than 30% of your available credit, or paying your card late could hurt your credit score. A lower score will make it more difficult to borrow for purchases like a home, which can help you build equity and increase your wealth. Lower credit scores can also lead to more expensive loans when you borrow for large purchases like cars.
Since utility companies, landlords, and even potential employers look at your credit score and credit report, a low score could also interfere with job opportunities, lead to larger deposits, and cause a host of other financial problems that make your life worse. financial situation.
Now, all these problems can be avoided by using your card responsibly, without charging too much and always paying on time. But that’s not always possible, so be aware of these pitfalls that could make your cards worse off.
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