Using credit cards to pay for just about anything has become the norm these days. It's easy to get out your credit card to buy now and pay later, but this convenience has turned into a habit for many Americans. If this sounds like you, you might be a credit abuser. Here are some red flags to watch for.
1. You Use It to Pay for Things You Can't Afford
Let's say someone has no idea how much money comes in and out of their household each month, and they find it easier to simply pay for items on credit and not think about it – and pay the minimum, but not the balance in full, each month. I call these types of spenders ostriches, because they often put their head in the sand when it comes to their finances. Without knowing your income and your budget for expenses, you can lose track – and this can lead you short on cash and needing to cover leftover expenses with credit cards and personal loans. The more active role you take in managing your finances, the less likely you'll find yourself in this predicament.
2. You Use Credit for Emergencies & Don't Have an Emergency Fund
If you find yourself charging unexpected expenses semi-regularly — whether it's a birthday gift or repairing a broken window — you may be abusing your credit. When you have an emergency fund or even excess income, you're less likely to have to rely on credit (and the interest charges that come with it) in unexpected or emergency circumstances.
Emergencies tend to pop up randomly, so you can never be sure how much debt (and subsequently interest) you'll have to pay when paying for them with credit. Instead, start putting money away into an emergency fund. Having a safety net of cash will make life's bumps much easier to pay for and provide you with far greater peace of mind.
3. You Have a Card From Every Store Where You Shop
I see this all the time, and sometimes it's humorous. A client comes in and shows me a stack of store credit cards so high that the stack topples over. Their wallets deflate and there are always extra cards hidden somewhere else, too — at home or even stashed in their car. This is because they have so many store credit cards they've stopped keeping track. I can't stress enough how abusive this is. You have to simply just say no sometimes!
Store cards often carry higher interest rates than standard credit cards, not to mention what this could be doing to your credit – particularly if you carry debt on them that's a high percentage of the available credit, or if you miss payments because you lost track of them. (You can see how your credit cards are affecting your credit by checking your free credit report summary on Credit.com.)
4. You're Playing the Balance Transfer Shell Game
I am sure you've gotten an offer in the mail for an interest-free balance transfer from your current card to a new one. It can be a workable option for getting out of debt – if you actually stick to a payoff plan. However, I've seen clients who'd done this every year or so but never paid off the balance. Eventually they'd lose track of this shell game and get caught without an option.
Sure, getting a lower interest rate might be nice, but opening a new card if you're not actively paying down the debt or at least addressing the source of your debt problem will only kick the can further down the road. There is a better option here: Stick to the basics when looking to pay down credit card debt. Make a repayment plan for yourself (this credit card payoff calculator can help you map it out), try to increase your cash flow and stop using the cards until you've gotten that balance down to zero.
5. You Look to Refinance Anything You Can Find
Not paying attention to your statements and only paying the minimum payment can result in your accumulating a ton of debt, interest and even possibly maxing out your card. When you get to that point, you may look to refinance your house, student loans or even borrow from your 401(k). This is a common knee-jerk reaction to resolving debt, but it is not a solution. It robs Peter to pay Paul and doesn't solve the underlying issues. If this is the panic button you're pushing, you could be a credit abuser.
Look for the best options to rid yourself of the problem and not just the symptoms. Consider seeking professional advice to help you focus and pay off your debt without taking money from your hard-earned long term investments. When using a credit card, you should ideally only make purchases you can pay off in full. That said, if you find yourself needing to pay down a balance over time, always pay down more than the minimum and refrain from using the card until you've wiped out the balance.
Credit can be an invaluable tool to help you get the things you want in life, and if used responsibly credit cards can be your best friend. But if you misuse it, or even abuse it, credit can turn into your worst enemy. Always make sure you're using the best practices when managing your credit. If you do, you'll find that you can have the best of both worlds; you can get the things you want and have the peace of mind that your finances are under control.
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