Credit cards can be a valuable tool in money management, and can even save you money if they’re used wisely. However, they may not be a good fit for every financial situation. Some users can get carried away with the prospects of their new card and end up developing spending habits that can have negative impacts. In this article, we explore three of the most common mistakes people make when trying to save money with a credit card so that you can avoid them.
Carrying a balance month to month
While there are many reward credit cards that can be used to your advantage, it’s important to use them with caution. Any forgotten balances or payments can quickly send your finances spiralling, negating any initial savings gained from their rewards programs. What’s more, even if you do set up a monthly payment such as a direct debit, it will usually default to the minimum payment required by your card provider.
Having made payments each month can lure you into a false sense of security, believing that you’re paying off your debt when in reality you’re barely scratching the surface. This is because credit cards are typically not designed to effectively manage long term debts. They usually have high interest rates, meaning any balances that are carried over month to month can quickly add up far beyond what you originally owed.
Spending more than you can afford
Credit cards can offer additional financial capabilities that you previously may not have had, which can lead to overspending. In fact, studies have shown that credit card holders are more likely to spend more and check out with larger baskets. Perhaps you come across a great deal on something you’ve had your eye on and decide to put it on your credit card, or purchase a replacement for something that isn’t truly necessary.
These kinds of additional purchases can defeat the entire purpose of using your card, which is typically to save money. As a result, it’s important to stay mindful of which purchases are ‘wants’ and which are ‘needs’.
Applying for too many cards
Once you get your hands on your first credit card, it can be tempting to start hunting for more. While having multiple cards can seem like it has many advantages, applying for too many cards, particularly over a short period of time, can have negative consequences.
Each time you put in an application for a new credit card, a hard search will be added to your credit report. Having multiple of these searches within the past few months can act as a sign to lenders that you may not be living within your means, leading to a reduction in your credit score. This can make it difficult to be granted credit cards and loans with fair interest rates in the future, and could even impact your eligibility for a mortgage.
In order to save money with a credit card, you’ll need to carefully plan and budget. By avoiding these three key mistakes, you’ll be one step closer to using credit cards in a financially responsible way.
