A financial service company or bank issues a credit card to allow cardholders to borrow funds to cater for their expenses while paying for goods and services. Credit cards provide the appeal for instant gratification and can significantly help you when you are short of cash. However, credit cards can be potentially dangerous, particularly for new card users; this is because they might be tempted to spend more than they can pay back when using the credit card to pay bills and make purchases. Below are some of the pitfalls of credit card debt.
Risk of getting into debt
One of the dangers of credit card debt is the risk of getting into more debt. This is because the more you borrow funds without repaying, the more you accumulate more debt. Debt can cause many other problems, including stress and other health issues that can have serious impacts. Being in debt makes it harder for you to reach your financial goals and objectives. Spending your money on paying your debt and bills leaves you less money for other priorities like saving for a summer vacation or retirement. You should recognize the signs and avoid getting into credit card debt, especially when you cannot pay the balances entirely for each month.
Tracking spending across multiple credit cards is challenging
It’s vital to track your spending since it’s the foundation or basis for a healthy financial life. Adding multiple credit cards to your everyday spending makes it challenging to keep track of all your spending. Making payments or spending using multiple credit cards makes it easy for you to overspend. Using multiple credit cards means that you have to track your expenses in different areas. You can track the different expenses you have made by using a spending spreadsheet, journal, or personal finance software like quicken or mint to track your spending.
Risk of destroying your credit score
A credit score tracks your payment and financial history, which is used in assigning a score to your creditworthiness. Financial institutions then use the credit score to decide whether they should offer you an auto loan. If you use your credit card correctly, you will be on the way to achieving a great credit score. However, if you make a mistake, for instance, miss a payment for 30 days or more, your credit score will take a hit and decline. The more mistakes you make, the more your credit score will fall. The best way to protect and build your credit score is to maintain balances below 30% of your credit limit, regulate the credit card applications you make and pay your credit card on time.
Temptation to overspend
A recent study1 showed that consumers spend more when paying for their expenses using credit cards than paying with cash. This is because it’s convenient and easy to pay for expenses with a credit card since you do not feel the pinch of cash leaving your pocket. You can avoid falling into this pitfall of credit card debt by setting a spending limit on your credit card, based on the amount of funds you can afford to pay for your card each month.
- Kluwer Academic Publishers. “Always Leave Home Without It: A Further Investigation of the Credit-Card Effect on Willingness to Pay.”