Have you ever been stuck in credit card debt?
If yes, that is surely a situation that you wouldn’t want to go back to. Having a credit card can be rewarding and convenient for cashless payments, redeeming rewards, and consolidation of expenses.
This is because the credit card is a financial tool but without the discipline of the credit card holder, there will be financial mistakes that you can make that will cost you a lot of money.
Avoid the pitfalls like the following:
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The more you reach your limit, the higher repayment you need. According to VantageScore, you should ideally not go over at most 30% of your credit limit because it doesn’t look good on your credit history.
Aside from this, there are other disadvantages of maxing out your credit card limit such as:
Lenders not liking a maxed-out credit card limit. If you approach a lending institution to get a loan or apply for another credit card, the chances of getting it will be smaller because you are showing through your maxed-out credit card that you cannot handle your finances properly (unless you pay the balance in full before the next billing cycle).
The balance will be harder to repay. Borrowing a high amount from a credit card will make it very hard to repay it if you don’t have extra cash because one usually gets a higher credit limit than your monthly declared income.
The minimum balance will be larger on the next billing cycle. This is because the minimum balance will be dependent on the overdue balance. If you will not pay the full overdue balance on your next bill, this would not be easy to tackle.
The minimum balance computation is not just a fixed percentage of the total overdue balance but a sum of multiple aspects of your credit card spending.
Late payments, especially if it’s more than 30 days overdue, can bring damage to your credit score. It doesn’t make sense to pay late because the statement is mailed to you 1-2 weeks before your due date.
Some disadvantages of late credit card bill payments are:
Monthly interest will be charged. There are different rates of late payment fees that can be applied to your account if you pay your account balance after the due date. This ranges from 1.99% to 3.5% for most banks in the Philippines.
You will have a bad credit record from the bank. There is no central credit bureau in the Philippines so there are limited ways on how to determine one’s credit history. One of the ways is through your records with various banks. A delinquent account with any bank can make a big difference on your credit history.
It affects rewards privileges with your credit card. Most rewards programs with credit cards are put on hold when you have any overdue balance in your account with them. That would be a waste if you won’t get the reward you’ve been saving points on if you don’t have a good credit history.
There are a lot of options if you think paying on time is a hassle. One way is to pay it online for a faster transaction. You can also consolidate all your bills in one due date or payment date.
A tactic to help you not miss payments (even if they are automated) is to mark your calendar or put an alarm on your phone with important dates like these.
Devote a time to read every fine print you see on transferring your debts to other financial institutions. Don’t give in to one-time or front promotions, because in the end, it will be costly on your end.
If you ignore or misunderstand rules in your balance transfer, you may end up paying for more so ask about the introductory offer and any transfer fees that might apply to you.
Some banks offer credit cards especially for balance transfer. Some of these are:
There are many benefits of consolidating your debt in one place. This can drastically reduce the amount of interest that will be applied to your account.
An important thing to note about balance transfers is that banks are stricter with payments for this kind of account. This is to help you get you debt down faster and not incur more costs based on the amount you need to pay off.
Paying only the minimum is better than not paying at all, but this will incur interests and makes it harder to pay your debts. The only difference is that you will not be bothered by bank calls.
This might seem good at first since you are paying small amounts without getting a bad credit score from your bank, but this will bite back in the long run.
Too many credit card is not a good thing. Multiple open accounts will just lead to you more temptations to spend beyond your means.
More credit cards = complicated financial management = debt
Credit limits will go up if you have a lot of credit cards since the combined power of credit cards can give you more purchasing power than you can handle. The thought of getting most items you can’t buy in cash in an instant can be very appealing but avoid it at all costs.
There are two types of cash advances:
Banks are clear on making cash advances for emergency purposes because it will give you high-interest charges and upfront fees. There is no grace period for the interest of cash advance. It is applied to getting the cash from the credit card, so use this feature sparingly.
Rewards aren’t free. You need to spend money first before you earn rewards, so spend only if you will pay the full balance in cash and just use your credit card to earn points. Also, check if your reward points will expire or get tax so you know when you will redeem them.
All these credit card mistakes will have an effect on your credit history.
Some sources of credit information in the government and private companies are CreditInfo.gov.ph, TransUnion Philippines, Bankers Association of the Philippines Credit Bureau, and the Credit Card Association of the Philippines (CCAP) C4 (Consolidated Cancelled Credit Cards) negative file. All of your transactions from financial institutions can be used when running a credit score check under your name.
With a goal to help Filipinos lead healthier financial lives, Moneymax regularly publishes tips and tricks on personal finance and lifestyle, among many other topics. For more finance-related news and articles, follow Moneymax on Linkedin.