According to the Federal Reserve Bank of New York, since mid-2021, inflation has surged, causing a significant rise in prices for goods and services. This has led people to accumulate record levels of credit card debt, expected to exceed $1 trillion by the end of 2023.
While the skyrocketing costs of food, energy, and housing are major reasons for consumer debt, bad credit card habits cannot be ignored.
Controlling how you use your credit cards is the first step to getting out of debt. Here are 11 credit card habits you need to change immediately to take control of your financial situation.
- Carrying a Balance
Carrying a revolving balance on your credit card makes each purchase more expensive due to interest charges. As your balance grows, so do the interest costs, which deduct a significant portion from every payment you make towards your account. Paying interest on any amount of your credit card balance also nullifies any rewards you earn, as the calculated interest rate is much higher than the rate at which you earn cash back, points, or miles on purchases.
Break this habit by treating your credit card like a debit card and only charge what you can afford to pay off in full. It’s also a good idea to check your balance monthly to know when to cut back on spending.
- Living on Credit
A recent survey by LendingTree found that 64% of Americans live paycheck to paycheck, with many relying on credit cards to balance their finances. While using a credit card to pay bills and cover other monthly expenses may seem like the only option when there’s no money in the bank, creating a budget can help you get your finances back on track.
Start by creating a detailed spending plan for savings and debt repayment. Review bills carefully to find potential savings, start meal planning to reduce grocery expenses, and track every purchase to ensure your money is spent where it’s needed. Use budgeting apps like YNAB or PocketGuard to help organize expenses and services like Trim to identify and cancel unused services.
- Maintaining High Balances
Having balances close to your credit limit can hurt your credit score. Although the Credit Card Act of 2009 prohibits credit card issuers from allowing accounts to exceed their set limits, which prevents over-limit fees, high balances still have other negative consequences, such as damaging your credit score.
Your credit utilization ratio, or the amount of available credit you have compared to what you owe, accounts for 30% of your credit score.
Generally, it’s recommended to use no more than 30% of your available credit to maintain a good credit rating. Using more than this amount will impact your score and make it harder for you to get loans for buying homes or cars.
- Paying Only the Minimum
Paying only the minimum amount due each month will keep you in a debt cycle that gets harder to repay over time. With increasing balances and rising interest costs, you’ll end up spending a lot of money just to repay the original charge.
For example, if you have a $5,000 credit card balance with an average interest rate of 20.74% and can only afford to pay $100 per month, it would take you approximately 117 months (almost 10 years!) to pay off the entire balance. In addition to the original purchase cost, you would pay $6,650 in interest. This means you would spend a total of $11,650 during this period.
Using a credit card repayment calculator can help you better understand your situation and take steps to pay off your balance faster by paying at least two to three times the minimum amount due each month. Better yet, using a balance transfer card can alleviate the increasing monthly cost pressures.
- Missing Payments
Pay close attention to the due dates for bill payments to avoid late fees and other potential penalties. Those who miss payment due dates can be charged up to $41 in late fees, and they’ll begin charging interest on purchases during that billing cycle. Delinquency on payment for 60 days or more will result in an increased penalty rate, making it harder for you to pay off your balance and leading to a vicious debt cycle.
If you’re struggling to pay your credit card bill, don’t ignore it. Call your credit card issuer to set up a payment plan to avoid fees and penalties. Alternatively, setting up bill reminders and automatic payments is a simple way to avoid these potential costs.
- Using Multiple Credit Cards
The more credit cards you have, the easier it is to lose track of your total spending and accumulate balances across multiple accounts, leading to destructive debt. It’s best to stick to using one credit card so you can closely monitor spending and ensure it stays within your budget. This also allows you to maximize rewards on daily purchases and monthly expenses.
To determine which type of rewards credit card is best for you, use services like Gigapoints, a credit card matching tool that analyzes every purchase you make and selects the credit card that offers the most rewards for all your purchases. Otherwise, review your year-end bank and credit card statements for 2023 to see where you spent the most and look for credit cards that offer bonuses for those categories.
- Chasing Rewards
In the long run, spending more money to earn rewards from your issuer costs you more than the rewards you get. Use your credit card only for carefully planned purchases and use other tools to increase cash back or other reward income.
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- Ignoring Bonus Rewards Offers
Many rewards credit cards offer the potential to earn bonuses each month for specific retailers and companies. These promotional offers can earn you more cash back, miles, or points when shopping through these companies, but you aren’t automatically eligible for additional benefits.
Such promotions are often sent to you by email and require you to log into your account and opt in to qualify for additional rewards. Ignoring these promotional offers may mean you miss out on extra rewards for purchases or travel reservations.
- Impulse Swiping
According to the Slickdeals Impulse Buying Report, the average consumer spends just over $150 a month on impulse purchases. While $5 here and $10 there may not seem harmful, these small purchases can quickly snowball and may leave you unable to pay off your balance before the due date. Tracking each purchase and following a well-made budget is key to avoiding debt.
It’s also a good idea to consider what’s driving these impulse purchases. If you can’t resist the deals, delete shopping apps from your phone and use Unroll.me to unsubscribe from store newsletters.
- Opening Store Cards for Discounts
Retailers offer immediate discounts of 10% to 20% if the account is approved. Although additional savings are appealing, for some reason, it is not. Would opening a new credit card for a discount is not a wise choice. Firstly, each time you request new credit, your credit score may be affected, putting your current loan applications at risk. Secondly, most store cards have lower credit limits, higher interest costs, and limited rewards earning and redemption options, making them not the best choice for most shoppers.
Ultimately, you’re better off using a general cashback credit card that offers more flexible redemption options. This doesn’t mean you have to give up savings. Instead, you can search for coupons online or use mobile coupon apps like CouponCabin to get in-store discounts by scanning at checkout and saving instantly on your purchases.
- Neglecting Savings While Paying Off Debt
A common mistake people make when trying to get out of debt is using all available funds to pay off balances. However, neglecting the need to save simultaneously can backfire and leave you with more debt later on. While it’s important to work on paying off high-interest debt, accumulating savings to handle emergencies is even more crucial.
An emergency fund can provide you with a cash buffer to rely on during economic hardships or unexpected bills, thus protecting your financial health. Having liquid cash ensures you can pay bills without relying on high-interest credit cards and falling into deeper debt.
Strive to save up to three months’ worth of living expenses in a separate account where it’s out of sight and out of mind.
Where you keep your savings is also important, as you can earn over 5% interest with a High-Yield Savings Account (HYSA). For example, Bread Savings currently offers a competitive 5.15% annual percentage yield (APY) and requires just a minimum of $100 to open an account.
Interest compounds daily and is deposited into your account at the end of the month, allowing your money to earn more returns for you. In contrast, the average annual rate at traditional brick-and-mortar banks is 0.46%.
