Let's face it. We all make mistakes. Some mistakes don't cost you a lot of money and they're easy to fix. But when it comes to credit, some mistakes can be very costly. There are many credit catastrophes you need to steer clear of, but here are three that can be particularly painful to recover from.
Credit Catastrophe #1: Getting a Large Cash Advance
This is an easy mistake to make if you haven't read the fine print in your credit card's disclosure statements. It seems like an easy solution when you need quick cash, doesn't it? And when you got that $500 advance, you probably thought it was no big deal because you'd pay the balance in full when the bill came. So you're thinking this: "I just scored an interest-free loan of $500!"
Well, no, it's not interest-free. In fact, it's a high-interest loan! When you get a cash advance, the interest clock starts ticking immediately. And the news gets worse. Usually, the APR for a cash advance is higher than your purchase APR. So if you have, for example, a 13.99 percent purchase APR, you could possibly have a cash advance APR of 24.99 percent! No, that isn't a typo. Cash advance APRs around 25 percent are not uncommon at all.
So if this has happened to you, pay this off as quickly as possible. Never, ever get a cash advance unless you're beyond desperate. And even then, explore other options first.
Credit Catastrophe #2: Buying an Expensive Item on a Deferred Interest Plan
This is a catastrophe can sneak up on the best of us. This is a situation where, even if you read the fine print, you might not completely understand what you're agreeing to do with regard to payment and interest. So you could end up with a nasty surprise if you still have a balance when the deferred interest period ends.
Sometimes you'll see these offers for expensive items such as furniture and appliances. That's why it's so appealing. You need something expensive and you have a chance to get it now without having to pay interest for a period of time. If the balance is zero when the deferred interest period ends, then you'll probably be fine. But what happens if you still have a balance?
Here's a typical scenario: You see a set of living room furniture at Macy's that you want and there's a promotional offer of deferred interest for a whole year if you use your Macy's credit card. It's easy to assume this means that you can make payments during the year, but that you won't be charged interest until the promotional period – in this case, 12 months – is up.
In many of these cases, however, here's how the deferred interest offers work: The year of deferred interest isn't an interest-free period (unless the balance is paid in full during that time). You just don't have to actually pay interest during the promotional period. But interest on that furniture starts accruing the day you buy it. If you pay off the furniture before that year ends, then you owe no interest. If there's a balance, then you owe the interest that has accumulated since the day you bought it.
And the interest rates are often high, such 20 to 25 percent or even higher. At publication time, the Macy's offer had a 26.99 percent APR. You can see how folks could end up paying much more for items because they didn't understand how deferred interest worked. So read the fine print and ask questions before agreeing to any offers like this.
And don't confuse deferred interest offers with credit cards that are offering zero percent introductory APRs. With the latter, you really do have an interest-free period until the introductory period ends. But with the former, you're only delaying the interest that you must pay if you still have a balance.
Now, deferred-interest offers don't have to end up being a catastrophe. If you pay the bill in full during the promotional period, this can be a good deal for you. But know what you're getting into and be realistic about your ability to pay the balance off during the promo period.
Credit Catastrophe #3: Getting a Debt Consolidation Loan and Still Using Credit Cards
For those who don't qualify for a balance transfer credit card, a debt consolidation loan with a good APR can be a golden opportunity. You have a chance to get out of debt while paying less interest than you'd be paying on your credit cards. And if you have debt on several cards, your life is simpler now. You make one payment a month on your debt and your goal is to pay off the debt during the life of the loan.
What can go wrong, right? Plenty. If you start using your credit cards again, you're creating a new source of debt. This is one of the biggest dangers with debt consolidation loans. Don't try to convince yourself that you'll use a credit card for just one purchase and pay it back in full when the bill comes. This is a slippery slope to more purchases and more debt. If you have extra cash on hand, apply to the monthly payment on your debt consolidation loan so you get out of debt faster.
So here's what you must do to avoid catastrophe #3: Make a vow that if you get a debt consolidation loan that you will not use credit cards again until you are completely out of debt. Stay focused on that loan and pay it off. When you're debt-free, you'll be so glad you did.
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