I remember credit cards. Keep in mind, I haven’t used one since 2009.
Back then, if you had a pulse, you could get a credit card. This was way back when the global financial crisis of 2008 – 2009 was still burgeoning.
What does this all have to do with first time credit card holders? A lot. You should know about it, because ignorance of such can case it to happen again.
Here is a great resource about the Financial Crisis of 2008. Read it when you get the chance.
Anyway, the Financial Crisis of 2008 is a macro-context of what can happen to you if you aren’t responsible with your credit card use.
Especially if you are a first-time credit card holder.
This crisis had many complicated causes and origins. But here is the shorthand explanation.
Financial Crisis 2008
Real estate corporations and financial institutions offered mortgages and bank loans to people who couldn’t afford them.
People who couldn’t afford such were known as N.IN.J.A.s, or, “No Job, Income, or Assets.”
You could get a credit card in 2008 without half trying back then. Not an exaggeration in the least. I had several.
Anyway, these various loan products were also bundled by financial firms and then sold to investors buying securities.
As the housing crisis hit, the behind-the-scenes problems with financial firms snowballed catastrophically.
You may remember former financial corporate titans Lehman Brothers and Bear Sterns went out of business back then.
Every news channel and financial cable news station was warning of a new Great Depression on a global scale.
That almost happened. Most people back then and today don’t know, or don’t want to know, how close the world came to cartoonishly finite financial ruin.
We could have all been reduced to Mad Max Fury Road-like living conditions by 2010.
Anyway, the government of the world gave financial bailouts to all of the countries that precipitated the problems.
And for the last decade or so, credit, bank loans, and mortgages were nearly impossible to acquire even if you could afford them.
This gave rise to the alternate banking system, or the P2P lending system, that proliferates now.
How does this affect you?
Well, I have sworn off credit cards. They are a slippery slope to financial drama. There will always be a reason, justification, or rationalization to purchase something.
Especially if you have never owned a credit card before.
Before I tell you the common mistakes to watch out for as a credit card owner, let me tell you about the consequences of misusing a credit card.
The $7,400 Hole
The number one cardinal rule for a being a responsible adult is to always budget your personal finances.
If you’re running a household, you need to know how much money you have coming in and going out.
You must know if you are satisfying financial wants more instead of your needs.
A budget helps you to appreciate the entirety of your personal finance situation. And, plan for financial dreams of the future.
However, almost 80% of Americans fail to adhere to self-imposed budgets.
Most people overspend about $140 over a typical $200 weekly budget, or the equivalent of $7,400 annually.
Meanwhile, Americans carry over $1.1 trillion in credit card debt collectively.
There are more than enough people already in financial debt traps.
So, with all of that in mind, here are some common mistakes you must avoid as a first-time credit card owner.
Overspending on Purchases
When you overspend relative to your weekly or monthly household budget, you’re incrementally creating a figurative snowball that you’re slowly pushing uphill.
Sooner or later, it’s going to become too unwieldly to handle and its going to roll over you.
Using a credit card can become very addictive. You can max a few out and overspend your budget and worry about paying for it later.
The problem is that if you are not used to using credit cards, you can become very used to the idea of paying penalty fees, making minimum payments, skipping payments, and always playing catch-up with your credit card bill.
Carrying Over Monthly Debt Consistently
A credit card is supposed to be a financial instrument of convenience. And, a facilitator for responsible financial debt maintenance.
For most people however, it becomes a self-perpetuating financial burden.
If you’re going to make a purchase with a credit card, make sure it’s a necessary one. Pay the bill in full before the monthly deadline as soon as possible.
If you pay your credit card bill late, skip payments, or worse, only make the minimum payment required, you’re just ensuring a never-ending future of accruing penalty fees, late fees, and mounting debt.
Applying for High Interest Rate Credit Cards
The average interest rate for most credit cards in 2019 was just under 17%.
Remember that the higher the interest rate, the more in penalties fee you’ll pay for missed payments, late payments, minimum payments, and so on.
Credit cards with high interest rates also eats away at any reward points you might accrue as well.
You’ll need a FICO score of 690 or better to qualify for low-interest credit cards.
Just pay your outstanding balance in full before its due and the interest rate won’t an issue.
Not Checking Your Credit Report
Your credit report is a record of your financial activities concerning credit cards, repayments, late payments, and so on.
Histories of bankruptcies and delinquency periods are also recorded on your credit report.
The accuracy of your credit report determines your FICO score.
Your credit report could have errors on it for a variety of reasons, so check it annually. Some credit cards has benefits that allow to check your credit report free regularly.
You can check your credit report here.
Do You Really Need a Credit Card?
My advice: don’t get a credit card unless you can afford to pay for it.
The irresponsible use of a credit card over a few years will negatively affect your life for decades.
Maybe even a lifetime.
Read More
ALLEN’S WEALTH: LESSONS LEARNED #1- NO MORE CREDIT CARD DEBT
5 WAYS TO BOOST YOUR CREDIT CARD REWARDS
UNDERSTANDING THE CONCEPT OF CREDIT CARD CHURNING
Allen Francis was an academic advisor, librarian, and college adjunct for many years with no money, no financial literacy, and no responsibility when he had money. To him, the phrase “personal finance,” contains the power that anyone has to grow their own wealth. Allen is an advocate of best personal financial practices including focusing on your needs instead of your wants, asking for help when you need it, saving and investing in your own small business.