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9 Reasons Credit Cards are Dangerous

Credit Cards Credit cards debt are on the rise and constantly viewed as the most dangerous form of financial debt. This is due to how the debt is formatted and usually difficult to pay it off.

Below are some reasons why credit cards are dangerous if they are not used accurately. On the contrary, building credit is a necessary form of essentially building wealth.

The best practice is to carefully manage both expectations.

Deadly Cash Advances 

When it comes to cash advances there are many reasons why they are dangerous, mainly because of their fees. Cash advances come with high-interest rates, usually, they are double compared to other purchases on your card. This is a top-selling product for credit card companies, and it is formatted that APR’s interests are higher than the norm and it does not provide any grace period as your other purchases.

Interest accruals – as for other credit card purchases may offer a window before the interest starts to accrue, whereas, in cash advances, the moment you are approved interest starts accruing.

Terms – it is crucial to fully know and understand the terms of paying back the cash advance, and how to avoid additional costs.  Some credit card companies may spread the cash advance amount you borrowed and add towards your monthly payments, but what it not thoroughly communicated is that there are two interest rates being charged and subtracted from your monthly payment. The best approach would be to payoff the cash advance first and then continue paying off your credit card balance


Too Many Cards and Promotions

When you start receiving many credit card promotions, it is advisable to first research if the credit card has benefits that actually benefit you.  Be mindful that credit card promotions are targeted to increase revenue and not the consumer in mind, just as mentioned above with credit card advances some promotions leave you in a worse state than before.

Credit cards should be used as leverage to build wealth, such as increasing your credit score, having the ability to borrow at a low-interest rate but due to mismanagement of credit card, it has become such a great disadvantage. Cards should not be used as a first option to cover expenses.


Annual Fees

 Annual fees are also another method used to generate revenues by credit cards. Some companies charge the annual fees and then charge an interest rate on top, so essence you are paying double for their great services. Another point to look, an annual fee is charged onto an account if you do not meet the required spending threshold. Shop around for a credit card that has options that are more favorable to the consumer and some credit cards can waive the annual fee if you call in and request it, unfortunately, it is bothersome to keep track when to call to have the fee waived.


Balance Transfer Charges 

Balance transfers are a great way to payoff debt at a cheap rate. For you to benefit from this method, it has to be used correctly and accurately track the credit card requirements.  Usually, with balance transfers, they come with an offer of zero percent for a specified amount of time if the balance is paid in full.  After the introductory phase, and if you still have a balance on that account from your transfer, usually the interest rate charged is at a higher rate.

When you make a balance transfer, be mindful of the terms and conditions, because some credit card companies charge interest rates if there is balance carried over, regardless of the zero percent. The zero percent is only applicable if there is no remaining balance from month to month, this can be a great disadvantage if one thought otherwise.


Intended Use 

First and foremost, credit cards should not be used to supplement income and or become part of your monthly budget. When credit cards become part of your budget, it can become easy to use them as liquid cash, which can easily get out of control and create a mountain of debt. Before getting a credit card, it is best to first define the purpose of that credit, just because there is available balance does not mean use sparingly. 

Uses

  • making ends meet
  • increase credit score
  • obtain rewards and cash backs
  • use is for zero percent balance transfer

Regardless of which purpose your credit card is serving, always have a strategy to actively pay off the balance each month. Other ways to save on the interest payments, would be to make two payments in a month.

Best approach – if you cannot afford to pay the full price in cash, you cannot afford to put charge it on your credit card.


Interest Rates

There are many variables that determine a credit card interest rate. Depending on your credit score and how much your credit limit is, it can be used to calculate the rate.  Other factors to consider before borrowing:

Type of Interest Definition
Purchase APR this is the rate applied to purchases
Balance Transfer any unpaid balance transfer after the grace window has a higher interest rate
Cash Advance this is a costly interest rate compared to the rest, two different interest rates are deducted from your payment (normal purchases APR  + cash advance APR)
Introductory APR this is usually through promotion and the interest rate is much lower during the promotional phase
Penalty Fees when you violate the terms and conditions (such as late payments) you get charged the highest interest

Best approach – not all credit cards are created equally and definitely do not offer the best options to all customers. By defining your objective before getting a credit card, surely helps when you implement a strategy that benefits you the most. For instance, if you want rewards and cash backs, it may be best to pay your mortgage or bills, which have a high minimum amount with a credit card and pay before the due date.

TIP – use other people’s money to gain financial leverage, such as noted above – charge your credit card for points or rewards and payback before they take your money (interest rate)

 


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Making Minimum Payments Only

Making only the minimum payment is a true way to stay longer in debt and the interest rate is considerate. There are different circumstances of not being able to pay off the whole balance on the due date, in that regard, it is best to try and pay as little as possible towards the interest rate. Below are some examples

Minimum Payments – it is better to pay a less amount interest rate than the full 30 days’ worth. If you make two payment in a month, this helps in the reduction of the interest rate that is being deducted from the payment

Grace Window – some credit cards, have a grace window before the interest rate is applied on the account, set up a due date that benefits you the most. For instance, if you are making two payments in a month, make the first payment within the grace window and make the second payment soon after the grace window.


Credit Cards Extra Charges

The idea behind credit card is that lenders approve you of a certain amount, in the hopes that you are able to pay back the amount you used. The lenders are bearing so much risk on your behalf, therefore, they are going to charge for that risk and more. Below are some of the charges that credit cards impose:

Types Definition
Foreign  Fees some credit cards charge additional fees for any foreign charges
Late Fees if you miss the due date, you will be charged a late fee, in addition, some credit cards add an interest rate on top
Over the Limit if you go above your credit limit, be sure you are going to get a charge for that
Payment Processing some credit cards, charge you to pay back what owe them, so essentially
Returned Payment if you do not have a sufficient amount in your account, be sure you are going to get charged for, plus a late fee and sometimes interest is added.

Not Having a Strategy

The greatest disadvantage when it comes to credit card debt is when one does not have a strategy of paying back. There are many different methods one can use to attack and pay off debt, but the best financial advice is to create a foundation, that does not require the use of credit cards. Maintaining good financial health and habits across all personal finances sections is imperative. Below are some methods to payoff credit cards,

  • paying more than the minimum payment
  • balance transfer – this works well when used accurately
  • implement various budgeting methods that accelerate debt repayment
  • request to skip a payment -if overburden request this option (be mindful as interest can still accrue)

Top Credit Card Questions

 

What are the easiest credit cards to get approved?

The easiest credit cards to get approved for all depends on your credit score. The higher your credit score, the better your chances of getting approved. Your credit score determines the conditions and the type of credit card you can get. 

Below are some criteria to consider before applying:

Low Credit Score – Usually with a low credit score you have limited options in getting a credit card. The easiest way if you cannot get approved is to a secured credit card. A secured credit is when the company uses your money and loans it back to you. The secured credit card normally has the same stipulations as a non secured credit card such as interest rate, monthly payment and reporting to credit bureau.  

High Credit Score – You normally have better chances of getting approved, the best option is to shop around. You may want to look for credit cards that have “good packages” such as mileages, credit card balance transfers, low interest rate, no annual fees, cash back or mileage points. All the added “packages” add up and can you save money in the long run.


What credit card can I get with a bad credit score?

The best credit card to get when you have a low credit score is a secured or student credit card. 

Secured Credit Card is when you use your own money and have it set up as a loan. Usually, with type of credit card you do have the ability to choose the monthly payment amount you are comfortable with. 

Student Credit Card they usually come with low approved amount. You can start with one and be diligent in paying off the balance every month. As time passes make sure to monitor your credit score, as it rises shop around for better credit card options. 


Can I get a Credit Card with a 450 Credit Score?

Credit scores range from 300 to 800. Depending on what your credit score it determines if you can get approved for a credit card. Usually with a 450 credit score, you may need a secured credit card as getting approved for non secured credit requires a higher score and that may be difficult.


How Can I build a credit if I cannot get a credit card? 

The best way to improve and build your credit if you have low credit score is to get a secured credit card. This is the fastest way to start building your credit score. The best advantage of this, you do not need a co-signer. 

Another method that helps in building your score is to have a co-signer on a loan. This helps you in establishing your credit as the credit bureaus are getting constant updates about your credit use. 

You can also establish credit history by being added to a third party’s existing credit card. The principle is the same, establishing your credit history through third party.


How do you get cash from a credit card?

 This is not an advisable solution as it is so expensive. There are additional charges and interest rate applied to the cash you borrowed from your credit card. To get cash from your credit card is usually referred to as cash advance. The best way is to call your bank and request the amount you would like to borrow, after that has been approved they usually advice you to withdraw the money from an ATM. The best method is to contact your credit card company as each company is different.


 

Can you pay a credit card with a credit?

Technically, you cannot pay a credit card with a credit. The other methods you can use are typically not conventional or widely offered on most credit cards such as:

Cash Back if you have a credit card that has offers cash back or any other package that you can redeem as cash, then you can easily have that redeemed cash applied to your balance 

Cash Advance this is not a good choice.  There are many related charges applied to your account on top of the normal credit card charges. This option allows you to get cash from your credit.


 

How does credit card work?

For you to get a credit card, you have to be approved first and the type of credit card and interest rate you get, is all depended upon your credit score. The higher your score the better rates you get. 

Once you have been approved, you can start using your credit card to pay for your purchases. At the end of your billing cycle, the credit card company will sent you a bill of of the total amount you have spent. You have two options, to either pay the full amount (which usually the best option) or pay the minimum amount stated on your statement. 

It is advisable to pay either the full balance or the minimum payment before the due date inorder to avoid additional charges. Additionally, do not go beyond 30 days without payment as this will be reported to the credit bureaus as a late payment. This has a tremendous effect on your credit score rating.


 

What is a credit card limit?

A credit card limit is the maximum amount your credit company has approved you for. For instance, if you have been approved for $5,000 dollars, this means you are authorized by your credit card company for that amount. You cannot go over that amount, any transactions beyond $5000 dollars, will be declined. 

Your good payment history can enable you to have your credit card limit increased. Some credit card company do it automatically, while others you have to call in and request for an increase.


 

How do you avoid paying interest on a credit card?

You can avoid paying interest on a credit card by not carrying a balance into the next billing cycle. Simply pay all the balance on the account.


 

How do beginners use credit card?

The best way for beginners to use credit cards and improve their credit score is to:

  • have a budget
  • pay off the balance each month
  • use your credit card, only if you have cash to pay it off
  • use your card for small amount purchases (gas, electricity) bills that you can easily payoff

Summary

There are great points to having credit cards, but everything has to be carefully managed. The best approach is to establish your objective of getting one such as, establishing credit, rewards or cash back’s, or increasing credit limit for a rainy day. It perfectly, okay to establish a high credit limit, but strategy and discipline have to be established to payoff the amount.  Conduct thorough research on which credit card best suits your needs.



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Brenda | www.DesignYourFinances.com
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