Credit cards are a useful and (dare we say it) fun way to manage money while also building good credit. As a bonus, many credit cards also come with added perks, like cash back on entertainment spending or low interest rates for certain windows of time.
However, poorly-managed credit cards can become a financial nightmare. Rats make a useful comparison–in an ideal environment, two rats can breed and become 482 million rats in just three years. If left unattended, your credit card debt of a few hundred dollars can become thousands if not paid off responsibly.
If you’re a first-time cardholder, don’t let your rats breed. Here are five essential mistakes to avoid when managing a credit card, so that your savings, and not your debts, multiply:
1. Spending More than You Could With Your Paycheck
Young people are especially prone to overspending with credit cards, but anyone new to their credit card could fall into this trap. Rather than using the credit card to make reasonable purchases, many mistakenly use their card to buy more than they normally would. Whether you’re splurging on healthy groceries or splurging on video games matters little– you’re still living above your means, and racking up debt that’s out of your pay range.
To avoid this problem, try treating your credit card as a debit card for six months. Instead of paying at the end of the month, pay the bill online each time you use the card until you’ve grown accustomed to managing your spending.
2. Missing Payments
Everyone’s busy, and it can be easy to forget a payment. Unfortunately, late or missed payments have repercussions, including late fees. Missing repeatedly might even result in you being called by one of the nations’ 8,513 debt collection agencies, which can be embarrassing and downright frightening if you’ve never handled debt before.
To avoid forgetting or missing payments, Credit Karma recommends setting up payment reminders through your phone’s alarm system. Set repeating reminders for a few days before your bill is due, so that you have wiggle room for reviewing charges and transferring money before making your payment on time.
3. Focusing on Perks, and Forgetting Interest or Credit Utilization
We all love a good deal, but sometimes it can be hard to recognize one when we see it. Many credit cards tempt individuals to spend unnecessarily by offering misleading benefits. As creditcards.com points out, a card with too high an interest rate might be costing you more than cash rewards can compensate.
Instead of focusing on cash-back bonuses, use your first credit card to learn about the concepts of interest, personal credit, and credit utilization. Remember to follow FICO’s advice of keeping your credit utilization ratio below 30% of your original limit to build your credit score, and not your credit debt.
Managing a credit card is a huge step towards financial independence and smart fiscal management. However, credit cards are fickle friends, and credit companies love to profit off the misinformed. If you’re thinking about opening your first credit card, be sure to avoid these three critical mistakes. Rather than a rat-like pile of growing debt, you’ll instead reap the rewards of a well-managed credit card.