Credit cards are great tools when used responsibly. However, if they’re used for long-term financing, emergency cash or a quick solution to avoid paying off your debt, they can cost you a lot of money and hurt your credit. Here are the four warning signs that you’re headed for credit card trouble — and how to get back on the path of responsible credit usage.
Sign No. 1: You only pay the minimum amount each month
On each monthly statement, two important amounts will be listed — the total balance and the minimum payment. By paying off the entire balance each month, you’ll avoid incurring interest. By paying the minimum payment, you’ll avoid late fees, penalty APRs and a possible ding to your credit, but you’ll still have to pay interest on your average daily balance.
So while the minimum payment will keep you from hurting your credit — provided your credit utilization isn’t too high, of course — it will cost you big time in interest charges. A credit card is a poor choice for long-term financing, because it typically has a higher APR than other debt options — like personal loans. Plus, the longer you use your credit card while only making the minimum payment, the more likely you are to go deep into consumer debt.
Turn around: Only put on your credit card what you can reasonably afford to pay off each month. If you’re already in credit card debt, discontinue card usage until you’ve paid off the balance in full. There’s no reason to rack up more debt while in repayment mode.
» MORE: How to pay off debt
Sign No. 2: You miss payments frequently
Each month, you should be making your payment on or before the due date. This due date can usually be moved to a date that works best for you — call your issuer to set a new date. If you’re frequently missing payments, it’s likely because (a) you keep forgetting to pay on time, or (b) you don’t have the cash to make the minimum payment.
Late payments can hurt your credit, as well as result in late payment fees and a penalty APR from your issuer. Generally, you can ask that your first offense be waived, but most issuers will not let it slide without penalty a second time.
Turn around: If you forget your due date on a regular basis, you should schedule automatic payments each month. Otherwise, set your online account options to email you before the due date so you can pay on time. If you can’t afford the minimum payment, you’re in the danger zone. Cease using your card if possible and get organized. You either need to spend less or make more to pay off your debt — check out this article for ideas on how to do both.
Sign No. 3: You get cash advances often
Credit card cash advances can be acquired through a bank or ATM when you’re short on cash. Most issuers limit the amount of your credit limit you can use for cash advances — typically only a few hundred bucks — so this will not adequately replace an emergency fund. But the real reason we discourage cash advances? They’re really expensive.
When you take a cash advance, you can usually expect a cash advance fee of 2-5% and an ATM fee. You’ll also start incurring interest right away — there isn’t a grace period on cash advances — and your rate is generally much higher than your normal APR. This all adds up to a lot of money just to get your hands on a few hundred dollars.
Turn around: If you need cold hard cash, a loan from the bank or a family member is likely the most affordable option. Going forward, you should save up an emergency fund to cover similar situations that will inevitably pop up. Make this emergency fund easy enough to access in case of emergency, but not so easy that you’ll spend it on unnecessary expenses.
Sign No. 4: You transfer your balance from one card to another regularly
Balance transfer cards are great for people trying to get out of debt and save on interest in the process. However, if you find that you’re transferring a balance from one card to the next — especially if you’re then using the old cards to run up new balances — you’ve likely not gotten a handle on your debt yet.
Balance transfers typically have fees between 3% and 4% of the transferred balance. They can also cost you in interest if you charge up your old card or don’t pay off your new card before the introductory rate expires. Remember, when you pay the balance-transfer game, you aren’t winning, you’re simply delaying a problem.
Turn around: If you have credit card debt that can’t reasonably be paid off in six months, a balance transfer may be a good idea. However, don’t continue to use your old card, and have a plan in place to pay off the new card before you start incurring interest.
Bottom line: If you’re making only the minimum payments each month, missing payments frequently, getting cash advances often or transferring your balance from one card to another regularly, you’re headed down a path of credit card trouble. Turn around and take the path of responsible credit card usage to build a good credit score and save money.
Warning sign image via Shutterstock