Credit cards are great tools if utilized well. They provide numerous perks, allowing you to earn cashback or rewards for purchases and even serve as tools to build credit – which can be important if you want to buy a house or car. However, some risks come with credit cards, and if you are doing so for the first time, be aware of these dangers and how to avoid them while using your credit card wisely – taking advantage of perks, benefits and rewards.
Here are some of the dangers of using credit cards and how to avoid these problems.
Risk of Overspending
Owning a credit card requires a lot of discipline. If you lack self-control in the area of spending, easy access to credit will stimulate your desire to buy and consume more. You will be easily swayed by the exciting rewards points, discounts and cashback offered, which will lead you to spend unnecessarily, thereby increasing your indebtedness.
Avoid the risk of overspending by maintaining a stick financial discipline. Check your outstanding balance often and keep track of all our spending. A great way to avoid unnecessary spending, leave your credit card at home when going out and use other means of payment such as cash, M-Pesa or debit card.
Missed Payments
Missing payments can harm your credit score and attract late fee charges. Remember that your payment history is one of the main factors contributing to your credit card score. Therefore, missing a payment can hurt your credit history for up to seven years. You don’t want lenders using your bad history to charge you higher interest or leery of loaning you any money.
Hence, maintain a positive financial outlook by setting up automatic payments met your credit card obligations. This way, you won’t have to worry about forgetting to make payments. Just ensure you have enough in your account for the automatic payment to be carried out. If this isn’t for you, then set up text or email reminders for then your monthly bill is almost due to make sure you pay on time.
Learn More: How To Build A Good Credit Score
Heavy Interest Charges
Carrying a balance on your credit card means that interest payments increase the amount of time it takes to fully pay off your balance. Interest payments on credit cards are quite heavy and can grow too quickly to keep up with. Therefore, don’t make the mistake of only making the minimum required payment each month. Doing so, you’ll end up paying for interest, as the minimum payments will have little impact on your balance which continues to grow month on month.
Avoid it by simply paying your balance in full each month or the stipulated interest free days to avoid paying heavy interest.
Maintaining High Utilization Ratio
Credit card utilization ratio refers to the amount of your credit limit you are using and is used as an indicator of lending risk. Creditors believe that when you reach your limit or exceed it, you will have trouble repaying the money. Therefore, maintaining a low utilization ratio makes you seem like less of a risk to the lender. Also, remember that your credit score can be negatively affected by maintaining a high credit card utilization ratio.
To avoid this, keep a low credit utilization under 30% of your limit. Other alternatives include limiting your spending by budgeting or paying off credit card debt to reduce your credit utilization ratio.
Susceptibility to Fraud
Owning a credit card makes you more susceptible to fraud. Fraudsters typically initiate fraud by duplicating cards at ATMs, point of sale (POS) or by accessing your details through email or over the phone. Ultimately, they may steal your identity by using your details to avail a new card in your name. I mean this is Kenya. Anything is possible.
To avoid falling prey to such, stay vigilant and monitor any transactions. Never share sensitive information with others, especially over the phone. Always have your card swiped in front of you. Also, get your credit report regularly to detect theft early. If you suspect anything, inform your bank as soon as possible on losing your card or detect suspicious transactions.
Learn More: All You Need to Know About Credit Card Interest Rates
Bottom Line
There are a lot of risks and dangers associated with owning credit cards, which can be minimized by following the above basic principles. However, the best way to deal with these dangers is to avoid complacency and maintain a simple sense of discipline when it comes to utilizing credit cards.