Credit cards are a double-edged sword. You can use them to earn hundreds, if not thousands, of dollars in rewards each year. Credit card churners game bonuses and special promotions to fly around the world for free. However, behind all the glitz and glamour, there is a dark underbelly to these little pieces of plastic. If mishandled, credit cards can quickly turn from a powerful financial tool to a source of financial pain and hardship.
Being aware of the most common pitfalls is the best way for people to guard themselves against this. This guide goes over the three most common ways people find themselves in financial trouble due to their credit cards.
- Tricking you into overspending. Imagine this scenario. It's near the end of the month, and you have $300 left over for the month after all your expenses are paid for. You also have $500 left on your line of credit. How much can you afford to buy for the remainder of the month? The correct answer is "it depends". The worst answer you could give is "$800". People often erroneously believe that just because their credit line allows them to make a purchase, it means they can afford to make that purchase. However, the concept of what you can or cannot afford is much more nuanced. You should always consider the cost of an item, beyond its physical price tag.
For example, if you buy something for $500, there is a lot more to it than just $500. First of all, if you can't afford to pay it off at the end of the month, you must consider all the interest charges that will be tacked on to it. Secondly, you must realize the potential cost of not having those $500 in your account next month. What are the chances that an emergency expense will come up in the next few weeks? Can you afford not to have that safety net of $500 in your account? It's important to consider these things before you commit to a large purchase.