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Despite what some well-known and especially loud voices in the personal finance space will tell you, credit cards aren’t evil. In fact, they’re one of the best financial tools out there for everyday people like you and me.
Credit cards are widely available, and you can even find them with no annual fee. In exchange for using one, you can earn rewards in the form of cash back and points for future purchases. A credit card is the easiest way to build credit, as when you make purchases using it and then pay your bill (on time and ideally, in full) every month, you’ll show creditors that you can be responsible with borrowed money. And credit cards come with robust safety features, such as fraud protection.
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Just because credit cards come with these useful features doesn’t mean it’s not possible to get into trouble with them. Overspending is a particular risk of credit card usage, because it can be easy to get carried away and forget that all you spend must be paid back. Here’s what you can expect if you overspend using your credit card.
You could max out the card
The possibility of this happening is dependent on your credit card limit and the kind of spending you do, but it’s certainly possible for a lower-limit card (which is what you might have if you’re new to credit cards). Maxing out a credit card is when you spend the entire allotted credit limit, leaving you with $0 in available credit and a big bill to pay.
If this happens, any additional transactions you try to make will be declined. If you’ve opted in for over-limit protection, you will be able to spend more, but you’ll be charged a fee for doing so. It’s not a good idea to max out your credit card, so keep your credit limit top of mind when using the card.
Your credit utilization ratio might end up too high
Charge too much on a credit card and your credit utilization ratio will increase. Your credit utilization ratio is the percentage of your available credit that you’re using at any given time. Let’s say you have a credit card limit of $10,000 on your credit card, but you’ve charged $4,000 worth of purchases on it. In this instance, you have a credit utilization ratio of 40%. However, it’s best to keep this number under 30% to avoid credit score damage.
Your credit score could take a hit
If you’ve overspent on your credit card and ended up with too high of a credit utilization ratio, your credit score could be at risk. Credit scores are made up of different factors that are also weighted differently to reflect their impact.
For your FICO® Score (the one used by 90% of lenders), credit utilization ratio makes up 30% of your score. It’s this important (second only to payment history, which is 35% of your score) because credit usage is reflective of your financial situation. If you’re so heavily dependent on your credit cards to maintain your lifestyle that you are routinely using more than 30% of your available credit, it signals to lenders that you might be in financial trouble now, or will be in the future.
You might have to pay interest on your balance
It stands to reason that overspending on a credit card means that you lack the money to pay off your balance before you’re charged interest on it. Credit card interest is bad news and having to pay interest on a huge balance can sink your finances fast. The average credit card interest rate is over 20%, and interest charges are compounded daily, so rolling over a balance month to month just means you’ll pay a lot more to get rid of your debt. It’s not a good situation to be in, and overspending on your credit card is best avoided for this reason, too.
Credit cards can be a great way to build credit, take advantage of fraud protection, and earn rewards on your spending. But they are best handled with care, so be mindful of how much you’re spending and do your best to use your credit card responsibly.
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1 Comment
Credit cards are not evil, just like money is not evil. the things we can do with either of them can be evil.
The problem in this article is the view that a credit card is a tool of a bank to ‘help’ you in your daily life. The better view is why would I want to utilize a device that keeps me in a perpetual type of limbo with tax (that’s basically what interest rates on credit cards are, only you don’t pay it to the government, you pay it to banks) that you can choose not to pay; but only if you pay off the card every month or a novel idea of not using them at all.
If you pay cash for all your daily purchase instead of a credit card, you don’t get a bill for the items later and you don’t end up over-spending (which is a very high percentage of the time).
Now I know there are many (even the writer of this article) who would downplay my view, and that is fine with me. Not everyone will aspire to live without debt, live within their means, live on less than they take home or put money into savings every time they get paid and every chance they get.
I challenge anyone reading my comments here to do 2 things.
One: spend less. I know it seems difficult during high inflation, but you have to want to spend less by doing research on anything you buy, yes, even food. which means not paying more for everything by having it delivered — get up, go out and get your meal. you’re not too busy, you have just allowed others to place a higher priority on your time (which does equate to your money…and this is about the only place where time is money, your money)
Two: save more. Again, novel concept. But if you spent the next three months putting into a savings account what you would normally spend on extras (movies, eating out, deliveries, drive-thru anything, etc) and focus on putting as much as possible into savings you will be surprised how your mindset can change. I know in my own experience it made me start to re-think every purchase, wait until I had the cash and now…I don’t buy as much I never really needed in the first place, have savings to do things I couldn’t before without using a credit card and paying more for everything due to interest charges and ultimately spend less time trying to figure out what’s in the box on the porch from Amazon (that I can’t remember ordering until I open it.)
So, there are people out there that play down credit cards and they’re not wrong if you use them and allow the banks to ‘tax’ you. but if you ween yourself off of them, I’m here to tell you, life is a lot different and in a very good way.