It wasn’t that long ago that financial experts were recommending young adults open credit card accounts to help them build up their credit. As a result of the variety of financial crises that have taken place in the last few years, these suggestions have since become far less common. Still, people of all ages get credit cards with the sincere and honest goal of improving their credit rating, which then turns into the sincere and honest goal of trying to get out of debt.
Whether you went into debt because you used your credit cards to make ends meet or because of various outside factors beyond your control, it’s important to understand how payments are applied and how credit cards actually work.
Making Your Payments Pay Off
There are two common pitfalls that keep people from paying off their credit cards in a timely manner: payments being applied to low interest rate changes instead of high ones and paying only the minimum balance.
1. Discerning the Difference between Low and High Interest Rates
Racking up interest is easy; lowering your rates is hard. One of the easiest ways consumers rack up interest is by applying their credit payments to the lowest interest items in their accounts, therefore letting their high interest accruing balances grow.
For example, if you have a zero percent interest balance transfer, credit companies will apply your payments to this amount instead of your charges that are gathering interest. There are no legal protections from these activities on the part of creditors, so your only options are to try to get work with your creditor or move your balance to another account.
2. The Folly of Only Paying the Minimum Balance
Along with large amounts of interest, one of the worst things you can do is consistently pay the bare minimum balance. Sounds crazy, right? But by paying the bare minimum, you’re actually prolonging your interest.
Doing this can make paying off even small balances drag out for years because every time you make a payment, your minimum balance becomes a smaller amount since it is a percentage of what you owe. Instead of paying the bare minimum, aim to pay a little more each month. Trust us; you’ll be thankful tomorrow for paying more today.
Unrealistic Plans Are, Well, Unrealistic
When you start planning to get out of debt, you are naturally going to want to speed up the process. This can take you from planning to send creditors $50 each week to deciding that you can pay off everything in three months if you only eat Ramen noodles the entire time. These types of plans are doomed to failure, and when you consistently don’t meet your goals, you may end up giving up entirely.
Instead of trying to stick to unrealistic plans, make a realistic budget — preferably one that includes more than one type of food. You may have to give up movie night or eat out less, but one or two small sacrifices are worth seeing your credit card balance shrink.
Now that you know some of the more common mistakes surrounding credit cards, check out last week’s post for tips on how to channel your inner cost cutter for more timely credit advice.
