When used wisely, a credit card can be a useful tool for managing your cash flow. However, it can be all too easy to slip into bad habits that lead to over-spending and debt. Falling victim to this is easier than you might think, so we’ve made a list of some traps for young players that will hopefully get you thinking about how you can stay in the black.
Don’t make cash advances
Withdrawing cash from your credit card, either over the counter or at an ATM, attracts a higher rate of interest that usually starts accruing from the day you make the withdrawal. This is different to a regular purchase where there’s often a window of up to 30-55 days where you won’t be charged interest on your purchases if you pay the card off in full. Cash advances can end up being considerably more expensive than a regular purchase and should be considered a last resort. In fact, try and avoid them completely if you think you won’t be able to pay the money back soon after.
By the way, a cash advance is not the same as withdrawing cash from a cheque or savings account that’s been linked to your credit card - it’s when you withdraw cash from your credit card account instead of using it to make a purchase. Cheque and savings accounts linked to your credit card are still ok to withdraw cash from - just make sure you press the right button when selecting the account.
Don’t spend more than you can pay off
It may seem obvious, but not spending more than you make in any given month is the key to staying on top of your credit card. Once you go past the point where the bill is going to stretch you financially, it’s time to stop spending.
Don’t make new purchases using a balance transfer card
Taking up a balance transfer offer of a low or 0% interest rate for a period of time makes sense if you’ve got credit card debt that you want to pay down. What doesn’t make sense is using that card to make new purchases. If you spend anything on a card after putting a balance transfer on it, the purchase will begin to accrue interest at the ‘normal’ rate for purchases, not the more favourable balance transfer rate, and you won’t be able to pay it off until you’ve paid off the value of your balance transfer.
Don’t get too close to your limit
Much like speed, your limit isn’t a target. Leave yourself plenty of wriggle room each month in case of emergency.
Don’t pay off one card with another
While a balance transfer at a decent rate makes plenty of sense, using one card to make the minimum payment on another is a recipe for financial disaster. It is essentially just a cash advance.
Don’t take your card to the casino or a night out on the town
When you’re out having a good time, plonking down the credit card for an impromptu round is all too easy a temptation, and likely one you’ll regret the next morning. Try leaving the card at home next time; you’ll probably have just as good a time, without the financial hangover.
The important thing to remember with credit cards is that the money you’re spending isn’t yours, it’s simply a short term loan — it’s easy to overspend when you fall into the trap of thinking about your credit limit as a spending limit. There are plenty more bad ideas out there when it comes to spending on credit cards, if you have first-hand experience on what not to do, we’d love to hear it, so please let us know in the comments section below.