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Editor’s note: This is a guest post contributed but Mike Brains
THERE IS something exhilarating about receiving a brand-new credit card in your mailbox with a healthy credit line. A whole world of options opens up right in front of you as soon as you open the envelope and out pops this little plastic card. You may have visions of redecorating your bedroom, taking a much-needed vacation, or visiting your favorite restaurant for a romantic dinner. However tempting these visions are to you, using a credit card for those reasons could be a very big mistake.
The average person is almost $15,000 deep in plastic, and the numbers are rising every year. The statistics are alarming. Before you take out that pretty little plastic card and wreak some financial havoc, take a look at the 5 biggest credit card mistakes to avoid.
1. Don’t live large on the plastic. Applying for a credit card to live the high life is one of the biggest mistakes you can make. Remember, this is not “free” money – even if you have a low interest rate, the charges for fancy dinners or vacations can pile up to something quite frightening. You may find yourself with a load of debt to pay off with not much to show for it. If you can’t pay for it in cash or pay off the balance at the end of the month, it might be a wise decision to pass on it, for now.
2. Stay away from maxing out your credit limit. Many people aren’t aware of this, but the closer you get to maxing out your credit limit on your credit cards, the more damage is done to your credit scores. This happens even if you pay your bill on time! If you can’t pay off the balance at the end of the month, at least try to keep the balance under the maximum limit.
3. Avoid cash advances. Cash advances, either from a withdrawal at the cash point or using one of those paper checks sent to you typically carry a larger interest fee than charging with a card.
4. Read the fine print. Most people just skim over their agreement with the credit card company, if they look at it at all. Read it thoroughly and understand exactly what the fees, penalties and rates are to avoid nasty surprises later.
5. Using a credit card as an emergency fund. You are much better off establishing a cash emergency fund rather than depending on a credit card. The interest rates and finance charges will cost you much more money in the long run.
Used responsibly and wisely, a low APR credit card can be an asset. However, it is very easy to fall into a black hole of debt unless you are smart about that little piece of plastic.
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