Oscar Wilde once wittily remarked, "Experience is simply the name we give our mistakes." Having made a few credit card mistakes during my initial encounters with credit cards, I believe that I have gained some 'experience', and would love to lecture you guys on the common mistakes that newbies make when they start using credit cards.
Being Indifferent to Credit
If you associate credit cards with the word "danger," then I guess you need to give it a second thought. Credit cards can be a great help in times of need. They are a great medium for building credit scores. Your credit score is a three-digit number, which can range from 300 to 850. Creditors use it to evaluate the probability of repaying your debts.
You just need to learn how to use credit cards responsibly. It's imperative that you inculcate decent spending habits so that you build a good credit report before you step into the financial world. Lenders can and will check your credit report to determine whether you are worthy of a loan. So, if you plan on getting a car, a home, or an apartment sometime later in life, it's high time you started working on your credit scores.
When you are new to handling credit cards, you might be confused and miss a payment. These missed payments have major consequences. As a first-time credit card user, you could be vulnerable to late fees as you may not clearly understand the dynamics of the credit system.
Your payment history directly affects your credit score; and if you fail one, you are sure to suffer. Not only will your credit score fall, but you will also have to pay a late fee, or even a high-interest penalty. The card-issuing company might also report the incident to the credit bureaus. If that happens, your credit report will carry a black mark for up to seven years!
So what should you do? How can you avoid this mistake? You must set yourself a reminder to check your credit card statement once it arrives. When you get the statement, scrutinize it to ensure that there has been no suspicious spending. You could set up monthly payment reminders too. Alternatively, you could link your card to your savings account and sign up for auto-payments.
Credit card companies are not your best buddies. They neither give you "free money", nor are they very generous when they tell you that you need not repay the entire borrowed amount within the billing cycle. These offers are so lucrative that we fail to realize the harsh consequences that would follow. We tend to spend a lot more than required... a lot more than we can afford to pay back.
Let's assume that you have a credit card with a credit limit of Rs.1,00,000. Never forget:
Do not spend your credit limit entirely.
Keep your expenses within 30% of your credit limit. In this case, Rs.30,000.
Repay the full amount in every billing cycle.
Your credit card company might tell you that if you repay maybe 10% of your used balance in the current billing cycle, you're good to go. This lucrative offer might allure you to follow through, and you might decide to pay the nominal amount of Rs.3,000. This move might push off your worries of repaying the rest of the money for a few days, but you won't realize that a huge rate of interest will be applicable on the remaining amount.
You might be spared the burden of paying big bucks at the moment, but you'll end up paying more than you had originally borrowed. Also, if you get into the habit of procrastinating your payments every month, you will inevitably fall into credit card debt. Paying off your debt on time is a good money-management habit. Developing this habit must be your primary responsibility when you start using credit cards.
When you suddenly get access to a lot of potential money, you might be tempted to become a spendthrift and spend more than you can afford. Doing so will undoubtedly land you in debt.
You must learn to control your expenses and set a budget for yourself.
Add your total monthly income. Add your regular monthly expenses like rent, food, supplies, fuel, insurance, etc. Make a record of your savings plan as well as miscellaneous expenses. Maintain these records in a journal, a mobile app (like Monefy), or an excel sheet. Set a goal for yourself. Follow this goal and track your finances consistently. Develop good spending habits. Pay all your bills on time. Use only one credit card when you begin. And most importantly, pay your credit card bill on time.
Understanding the terms and conditions of a credit card can be more difficult than complex mathematical problems. APR is one such concept which new credit card users are often unable to comprehend.
Credit card companies usually give you the option of paying just a nominal amount every billing cycle instead of settling the entire loan. If you do this, you carry forward a balance to the next month, which accumulates interest. If you keep doing this every month, the amounts gather.
The penalty APR is applied to the total amount to form a huge debt. Penalty APR stands for Penalty Annual Percentage Rate. And well, in case you do not know, credit card interests can be notoriously high. It can go up to an incredibly high of 16%. If you pay off your full balance within the due date every month, you won’t have to pay interest on that balance.
Being a new credit card user, you should always keep track of the following:
The date your payment is due
The purchase APR and penalty APR
Set yourself a budget, spend according to it, pay off all your balance every month and stay away from debt. If you can carefully manage these, you can easily dodge the bullets that credit cards might fire at you. Moreover, don't forget to check your credit score regularly to make sure that you are on the right track.