Steer clear of these common traps that can hurt your credit and keep you mired in debt.
Credit cards and loans can better your life by allowing you to pay for emergencies, buy a house or car or make home improvements. At the same time, some types of credit or credit practices can work against you if you’re not careful. For example, you may accrue so much credit card debt that you have trouble making payments on time, which can lower your credit score. You might even rack up so much debt that you can’t afford to pay it off, forcing you to file bankruptcy.
When used wisely, credit cards and loans can be beneficial, but it’s also easy to play fast and loose with credit options and habits that can drive you into accruing a large amount of debt that takes a long time – several years, or maybe even decades – to pay off. Fortunately, it’s easy to avoid the most notorious debt traps, once you know what to look for and other credit or spending options that work better.
Living beyond your means
One of the fastest ways to end up with thousands, or even tens of thousands, of dollars in credit card debt is to live beyond your means. For example, if you go out for lunch, dinner and drinks all month long when you make just enough to pay your rent or mortgage and recurring monthly bills, you’re probably charging those good times on a credit card that you can’t pay off each month. If you take out a huge loan for a luxury vehicle and can’t make the monthly payments without putting your utilities on a credit card, you’ll have not only too much credit card debt but also a massive car loan haunting you for years.
To keep from living beyond your means, create a budget, allocating for all recurring expenses, such as utilities, rent, groceries, insurance and other monthly bills. Then look for areas where you can scale back. For example, if your car payment eats a huge chunk of your salary, consider selling that pricey car and purchasing a more affordable used model with lower (or no) payments. If you run up hundreds of dollars each month dining out, take your lunch to work a few days a week and prepare more meals at home.
Hitting the ATM for cash advances
Who doesn’t love instant money? But you’ll pay a hefty fee for convenience when it comes to fast cash. For example, when you use a credit card at an ATM to get a cash advance, the card issuer charges a cash advance fee that’s either a flat rate or a percentage (generally 3% to 5%) of the transaction. The average cash advance fee for the second quarter of 2021 was $8.20, according to personal finance site WalletHub. You’ll also pay a high APR on cash advance amounts. The average APR for cash advances in the same quarter of 2021 was 20.64%, according to WalletHub.
Being an insurance cheapskate
We all love a good deal on car, homeowner or health insurance, but if you’re saving money in exchange for a high deductible, getting a policy from a fly-by-night company or even worse, not having insurance at all, you’re playing a dangerous game. For example, if you’re seriously injured in an accident, you could owe thousands, maybe even tens of thousands, of dollars in medical bills. If you’re at fault in an auto accident, you could end up liable for medical bills and other damages.
To avoid this potential debt trap, compare policies with several insurance companies, choosing a policy with a premium and deductible that you can afford.
Charging thousands for a sign-up bonus
Many credit cards offer a lucrative sign-up bonus that the cardholder receives after charging the required amount for the bonus, typically within 90 days after the card is opened. For example, a credit card may offer a 100,000 points or $1,250 sign-up bonus after you spend $4,000 in the first three months. That’s a fantastic bonus, if you’re able to pay off your monthly statement balance to avoid paying interest and carrying a high balance. If you charge $4,000 and can’t knock the balance down fast, however, the interest you will pay over time could seriously offset the amount of any bonus you received.
The good news is that plenty of cards with decent sign-up bonuses have a lower required amount in purchases to receive the bonus. If you’re not absolutely sure you can pay off thousands of dollars in just a few months, stick with a card that offers a smaller bonus – $200 after you make $500 in purchases in the first three month, for example – but a greater chance you’ll be able to pay the balance off fast.
Published by Debt.com, LLC