Alright! Let me start by saying credit cards are essentially not bad but they are very easy to mismanage and if you are not careful, you can exaggerate its importance.
When I first got a credit card I made all the possible wrong choices that you can ever make with a credit card. I did not understand the concept behind a credit card when to use it and neither did anyone ever teach me how to use it.
But here’s the good thing, I made the mistakes so you don’t need to make it.
Building your credit is very important no doubts. You need it to get the best rates when you want to purchase a house, cars and sometimes even cell phone plans
Credit history shows your level of financial accountability and with great credit, you qualify for the best rate for almost everything that requires it.
But here’s the thing! at a young age, you most likely don’t need to make such huge purchases that require it yet and if you do there are ways around it. For example, Â cell phone plans that require it are usually postpaid, but an alternative is to get on prepaid (pay as you go)
Credit is not a course you take in school (at least not my school) so we do not have a proper understanding of it. Financial institutions play on our vulnerability and sometimes sell it to us as free money like they did to me because how else would they make money off us right?
And instead of us to start building early we destroy it!
But, here are the 4 traps you do not want to fall in;
1)TARGETED ADVERTISING: I have applied for a credit card twice (even when I didn’t need it) and they all came from targeted advertising.
Now if you own a credit card or you are trying to build your credit. Then you know the worst thing you can ever do while trying to build your credit is to apply for more credit. Applying for credit is a red flag to credit agencies because it makes them think you are self-reliant on credit which in turn makes them feel you won’t be able to pay when they eventually give you credit
I know what you are thinking! How stupid?
Yes, It is stupid to know this fact and go ahead to apply for credit especially when you don’t need it but could you blame me? we all make not too smart choices
How did this happen?
At the time I was trying to build my credit so I did a lot of research about building credits, watched a lot of videos on credit. I even downloaded the credit karma app. The credit karma app gives you an estimate of what your credit score is (It isn’t accurate but it gives you a pretty good idea). It also helps you keep tabs on your credit that way you get notified if there is a hit your credit, an increase or a decrease. Also gives you tips on how to improve it.
Long story short, it is a really great free app and I highly recommend it but you have to be careful.
when I got the app, most of the ads I was getting were credit card related. Because I was trying to build my credit, the ads were not just about credit card but also low credit, non-existent credit and the best cards for them. In fact, whenever I opened the credit karma app it gave me the best credit card options for my specific credit history.
The kind of ads I was getting were specific to my needs at the time and I just thought this is what I needed to build my credit
That was such a wrong move for a number of reasons
- You most likely will be declined: The way the ads are positioned are tempting but they are very strategic. They say things like low credit, no credit, low annual fee, etc and that makes you feel like they are speaking your language. But the ugly truth is, depending on how low your credit score they will most likely deny the application. As much as they want to make money of you, seeing that your credit is bad is a risk for them too. Because it shows you lack financial responsibility. What is even worse, is when they do deny the application YOU JUST MADE YOUR CREDIT HISTORY WORSE. That would take a hit on your credit score and other institutions will have no reason to lend you. Seeing as one institution just denied you then you become credit unworthy. Not to say you cannot get any credit, you probably can but the interest rates will be ridiculous. If you can not make the high-interest rate payments and you default you just might be stuck in an unending cycle of bad payment history and bad credit scores.
- You just increased your debt: If you get approved its just unnecessary debt. if you felt the need to apply for a credit card, chances are you are like me and you just lack financial responsibility. There is no reason to apply for more credit when you already have one. The goal is to live below or within your means. Applying for the credit card just increased your debt by the amount you are approved of $1000. Always remember! it is money you do not own and whatever you use from it is debt.
If you have 2 cards that twice the debt you do not want.
If you are just starting out in your adult life, you probably still have student loans to pay off and this unnecessary debt is just one you don’t want to have.
And if you already do, it okay! because we all learn at some point.
Try to stay off loans and budget better so you can effectively manage to pay off the ones you already have
The irony in this one is laughable but still important to know.
You know how sometimes you get a mail, or a call from your bank even when you open your online banking app you get the message that you qualify for a limit increase. DON’T FALL FOR IT!!
Okay! To be real that is one is a good indicator.
You deserve all the props! As a matter of fact, I am giving you props over here!
The fact that you are being offered a limit increase shows that you have been responsible with your finances and can manage your resources so they find you more creditworthy
Isn’t that amazing! You are one step closer to qualifying for the best interest rates
even though it is great, that isn’t how you should treat credit. Think of credit as an emergency fund that really isn’t your money.
If you are like me and you are still figuring out how to be better at managing your finances efficiently you should decline the offer.
You tend to spend more when you think you have more. And I said it really isn’t your money. It is for the bank and you have GOT TO PAY IT BACK EVENTUALLY!
Why am I saying it,
I did that. I increased my credit limit from $500 to almost $1000 and guess what!
I caught myself spending more and struggling to pay it back.
When I had it at $500 It was even better because if I maxed out the card(even though you should never) it was easier to pay it off. The worst-case scenario I could get $500 and pay it at one goal.
When I increased it, paying it off was making me put all the money I got into my credit card. I didn’t like the idea of it so guess what I did!
I made the minimum payments! Isn’t that convenient; paying $20 instead of $1000
Which brings me to my next point
MINIMUM PAYMENTS: Alright making minimum payments lets you avoid late fees quite alright but you know what else they do;
Keeps your credit score growth at a low pace: If you are trying to build your credit, now one way to improve that is to keep your usage low. This shows credit bureau that you make your own money and you are not reliant on your credit card
So if you have a credit of $1000, you want to keep it below 25% =$250
Which means ideally, I should only be spending roughly around $250 every month but here I was all maxed out
Now I make the minimum payments of about $10-$20 every month, which means that I am still almost at the max and my monthly usage isn’t reducing either
Interest rate: You get to pay interest on your outstanding balance. Depending on the credit card you use interest rate could go as high as 21.99%. Now if you are making $10 every month minimum on your card and you are paying interest that high on the remaining balance. You are avoiding late fees to pay even more.
Not enough money: Like I said credit cards should be treated as emergency funds and tools for building up our credit. If you find yourself in an emergency when you need the funds, you already maxed out your credit. What you gonna do now?
All was going well till that credit increase mail came!
So to avoid making the mistakes I made;
Try to keep your credit at an amount that is easy to pay off.
If you do increase it, try not to overcompensate by purchasing things that are unnecessary.
your credit card should not be your primary source of spending.
INSURANCE/REWARDS: Insurance and reward programs aren’t really one of the main reasons people try to get credit cards but I will say it does affect their decisions in choosing the right credit card. Depending on your income and your lifestyle you may want to choose a card that is tailored to you. For example, a shopper vs a traveler. You may want to pick a cash back card as opposed to a travel rewards/air miles card.
There is absolutely nothing wrong with doing that because you can use your points to finance your lifestyle which in turn may save you money.
The cards with the best insurance and reward benefits tend to have higher annual fees and charges associated with them
Truth be told! You may never use those benefits for a year
If you are just starting out and trying to build your credit and you think you need a credit card for that, I strongly suggest applying for the low annual fee, budget-friendly card
Another thing is, it can be a go big or go home situation(probably not the right word for the context lol)
But still, the point I am trying to make is;
You may only qualify for a lesser credit card and then you apply for a higher credit card. Because you applied for the higher one credit card that particular application may be declined.
By now you know what happens when you get denied! Don’t you?
Let me remind you!
It is terrible for your credit history.
Let me just add this: you may still qualify for an alternate card that the bank offers but why would you want to get declined in the first place.
Educate yourself by seeking advice from financial experts to understand what is best for your needs to enable you make the best choices
I guess what i am saying is dont be me! just kidding
- Try not to click every targeted ad without seeking financial advice
- Try to keep your credit card usage and limit as low as possible
- Educate yourself about credit cards before making the move, if possible seek out a financial advisor.