The Credit Card Mistake That Costs Americans Billions
by Donna Wright:
Count me in! I am one of the Americans who has repeatedly made the biggest credit card mistake contributing to billions of dollars in wasted money.
Fondly Remembering My First Credit Card
I remember it well. A beautiful maroon colored plastic credit card with my name on it along with the “JCPENNEY” logo sprawled across the card. I was so excited that you would have thought I won the biggest lottery prize. I was so proud. I could go buy a pair of blue suede “Candies” brand shoes with 3 inch spiked high heels. Oh, they were a fashion statement and well worth the $14.99 price tag and the box of Band-Aids to cover my blisters from wearing them.
But here’s the best part of my JCPENNEY credit card: As soon as the paper credit card statement arrived in the mailbox, I would responsibly write a check for the full amount due and mail it.
That’s where my love story with credit cards (and high heels) ends.
Credit Cards Have NOT Been My Friends
To give you my story in a nutshell, I am quite familiar with using a credit card due to the lack of a continuous flow of cash to buy necessities. Whether it was raising my son as a single parent or the time I unexpectedly was laid off from my 20-year job while self-publishing my very first book, credit cards saved the day, or so I thought. Yup, that book venture forced me to put $7,500 on my Discover bill for the printed book copies because I found myself unemployed.
So, as I’m coming clean with credit card mistakes, I can tell you that I know how it feels to max out credit card limits. It’s a sucker punch to your gut. And the worst part, you work hard to pay off the debt, and then years later, you find yourself in the same predicament again.
Domino Effect of One Credit Card Mistake
Using a credit card to pay for goods, services, and even vacations should be looked at as a temporary borrowing of money. But that’s not how it happens in reality. If you’re diligent about using a credit card and pay your balance in full every month, kudos to you. You can stop reading. However, for the rest of us, we need a wake-up call … and right now.
Let me set the stage:
- You make a purchase.
- You pay with a credit card.
- Your credit card bill arrives.
- You don’t have the cash to pay in full.
- You pay the minimum payment due with intentions to pay the balance next month.
- Next month comes, and you have to make a minimum payment again.
- Unbeknownst to you, the terms of your credit card clearly state that the continuing balance due will incur an 18% APR (or much higher).
- So that simple purchase has now been increased by an 18% penalty for not paying.
High interest rates have cost Americans billions of dollars in debt, all because we continue to use our credit cards when we don’t have the means to pay the money back in full. In fact, according to TransUnion, the average credit card debt per American late last year was $6,715.
High Interest Rates: BIGGEST MISTAKE and Silent Money Killer
When you sign up for a credit card, a bank sometimes flashes a “0%” APR banner in your face. However, the zero part gets lost in the translation. For example, I bought a new laptop from a large chain store and was thrilled when the cashier helped me open a store credit card account to pay for it, with 0% APR. The only catch was that I had to pay the total amount due within six months. Of course, that sounded perfectly doable. That laptop was going to increase my work productivity and earn me more income, right? Wrong.
Let’s face it. Life gets in the way of paying your bills even when you have the best of intentions. So, what happens when you accidentally miss a payment (or two,) or you only have funds to pay the minimum? I’ll tell you what happens. Before you know it, that six months of the 0% interest rate is catapulted up to 20% and now you’ll be paying way more for that computer than it originally cost you.
Duly note: As per a recent article on Forbes.com, the Federal Reserve reported that the average credit card interest rate on accounts with balances was as high as 22.30%.
It’s important that you understand the terms and conditions of your credit card before you use it. I’ll bet you’ll think twice about using it when you learn the card's APR, annual fee, late fees, and grace period.
There’s more to credit card mistakes than just paying high interest … there are a handful of other missteps that lead you into a debt cycle.
Help! I’m Trapped in a Debt Cycle and Can’t Get Out
A credit card debt cycle happens when we spend more on our cards than we’re able to repay monthly. While we think we are making progress paying the balance, the high APR on the balance due, is actually increasing our debt. That’s because a monthly payment just covers the cost of interest on that outstanding dollar amount. And now you’re caught in a debt cycle, where the balance never decreases.
But there’s more to the high interest story. Once you made the mistake, it produces a domino effect of other credit card mistakes. Don’t kill the messenger, but avoiding credit card mistakes is crucial for maintaining financial health.
Payments are Not Created Equal
The clearest way I can explain credit card payment mistakes is to present the scenarios:
Pay the statement balance in fullPay minimum payment duePay an amount more than the payment due and less than the balance dueMiss a payment altogetherMake a late payment
Always aim to pay your credit card balance in full to avoid the high interest. While it’s recommended that you should always make at least a minimum payment, aspire to pay more than the minimum. Minimum payments can prolong the debt because of the high interest added.
Here's an example:
You owe: $5,000Annual Percentage Rate (APR): 20%Minimum Payment Due: $100 (2% of the balance)20% interest that you will owe on the $5,000 balance: $83.33
That means you will pay a $100.00 minimum due but out of that amount, $83.33 will go towards the interest and only $16.67 will be deducted from your $5,000 balance. So, while paying only the minimum keeps the account in good standing the debt barely goes down.
But worse than a minimum payment, is missing payments or paying a late fee. Late fees are such a waste of your hard-earned money. An average late fee can cost more than $30. Also note, if you’re 30+ days late on a payment, it will get reported to credit bureaus and show up on credit reports like Experian and TransUnion.
Set up automatic payments so you never miss or pay late in the future.
Ignoring Your Debt Won’t Make It Go Away
Again, I am guilty of NEVER looking at my credit card statements. I like to be in denial about the credit card damage I can achieve in one month. However, reviewing a statement can also shock you to the point of fixing a credit card mistake in the future. You may even see an unexpected charge, like a no-longer needed subscription renewal, or perhaps a fraudulent charge.
Regularly checking credit card statements can help catch issues early and help get you back on track for budgeting. Following these best practices can help you avoid experiencing a bottomless debt cycle.
Key Takeaways
Avoid carrying a balance, plan to pay the full balance every month. Pay at least the minimum payment.Avoid missed or late payments by setting up autopay.Understand credit card terms and conditions to prevent high interest charges.Solve your credit card issues or avoid mistakes to improve your overall financial well-being.
Author Bio: Donna Wright is a personal finance blogger for MoolaStakes.com, who enjoys researching, fact-checking, and expressing complex subjects in understandable terms. As a single parent, she knows the pitfalls of poor money management but also knows the satisfaction of improving finances. Her mission is to provide accurate, unbiased money management insights to money-conscious folks, just like her.
This article is for informational purposes only and does not constitute financial advice. Readers should verify all details independently and use their own judgment when following these practices.