- Credit cards can be used responsibly or in a way that hurts your finances.
- Using credit cards the wrong way can have long-term financial consequences.
- Paying interest is just one of several ways credit cards could make you poorer.
Are you at risk of damaging your finances with your credit card use?
Credit cards can be a great financial tool that helps you improve your finances -- under the right circumstances. Unfortunately, if you make mistakes with your cards or use them in the wrong way, they could actually make you poorer.
Here are four possible ways credit cards can worsen your financial situation.
1. You could get stuck paying high interest rates
Credit card interest rates tend to be quite high. In fact, it's not uncommon for cardholders to owe interest at a rate of 17% or more. If you don't carry a balance, these high rates don't matter and you can benefit from credit card rewards without paying any interest.
But as soon as you leave part of your statement balance unpaid, your card issuer will start charging you. Interest costs could add up to thousands of dollars over time, especially if you make only minimum payments and get stuck paying interest for years.
The interest costs you pay could end up adding up to more than the original amount of your purchase -- which could leave you considerably poorer since you'd end up paying several times over for everything you charged.
2. You could tie up your money due to monthly payments
Once you start carrying a credit card balance, it can be difficult and expensive to repay. As long as you have that balance, you'll owe a monthly payment to your creditors. That payment will eat up income you haven't even earned yet.
Since you'll have to devote part of your future paychecks every month to repaying your past credit card balance, you'll have less money left. You may find it more difficult to cover your costs without getting into more debt, and you may not have spare money left over to invest or save for important financial goals since it's all going to creditors for past purchases.
All of this can leave you worse off financially by lowering your net worth and preventing you from investing for your future.
3. You could get hit with late fees or over-the-limit fees
If you charge too much on your card and go over the limit, your card issuer will probably charge you a fee. You could also end up owing fees if you're late making a payment. And in some cases, violating your cardmember agreement could trigger a higher penalty APR that makes your debt even more expensive.
Any fees or added interest costs you pay because of these credit card mistakes will leave you with less money for other things.
4. You could damage your credit score
Maxing out your credit card, using more than 30% of your available credit, or paying your card late could all hurt your credit score. A lower score will make it more difficult to borrow for purchases such as a home, which can help you build equity and grow wealth. Lower credit scores can also lead to more expensive loans when you borrow for big purchases such as cars.
Since utility companies, landlords, and even potential employers look at your credit score and credit report, a low score could also interfere with job opportunities, lead to larger deposits, and cause a host of other financial problems that worsen your financial situation.
Now, all of these issues can be avoided by using your card responsibly, not charging too much, and always paying on time. But that's not always possible, so be aware of these pitfalls that could result in your cards leaving you worse off.
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