Credit cards can certainly be a useful financial tool. Used responsibly, they help you build a good history. And you can even make a profit by using rewards cards. But there's also a dark side to cards and you need to stay far, far away from it.
Here are four very common disasters that you absolutely must avoid:
Disaster #1: You Have Debt and You're Still Using Your Cards
There are two words to describe the pain that you will soon have: compound interest. As your balance grows, you are charged more and more interest. If you only make minimum payments, you end up paying interest on the interest. Don't let this happen to you.
Step away from the cards and assess your situation. If you still have a decent FICO score, consider a balance transfer card so you can pay off your debt without accruing interest for a year or so. You have to use the card properly, though, or you'll end up in Disaster #2.
If you're in over your head, contact the National Foundation for Credit Counseling. In many cases, you can get a free one-hour consultation to help you figure out what your next steps should be.
Disaster #2: You Misused Your Balance Transfer Card
A balance transfer card with a zero percent APR allows you to pay off – or at least pay down – your debt for a specified time period, usually 12 to 18 months, without being charged interest. One of the most common mistakes consumers make is using the balance transfer card for new purchases. You can't pay off your debt if you keep adding to the total.
Determine how much you need to pay per month to pay off your debt before the offer expires. If there's a transaction fee, include that amount in the total you now owe. Your goal is for your balance to be zero, or at the very least, greatly reduced before the zero percent APR ends. Stick to your payment plan and don't use the card for purchases.
Disaster #3: You Made a Very Late Payment
If you can't pay the bill in full, it's terribly important to at least pay it on time. The standard advice out there is that card issuers won't report a late payment to the major credit bureaus unless it's at least 60 days late -- but don't count on that in every instance. The issuers have the right to report you to the bureaus if you are late by 30 days or more.
Late payments can really drag down your FICO score. As your score goes down, it creates a lot of unpleasant scenarios. Your issuer might worry that you're having financial troubles and increase your interest rate. So be careful about paying your bills on time. Set up calendar reminders or automatic payments. Do whatever it takes to ensure prompt payment.
Disaster #4: You Don't Track Your Spending
You might even have a budget, but if you don't track your spending, you will most likely overspend. This is a slippery slope to credit card debt. These days, there are wonderful online tools to help you budget and track expenses. Even better, many of the best ones are free.
Get online and play around with different programs. Many of them also have smart phone apps, if you prefer to track your spending that way. So stay on top of your spending and you'll avoid debt, which is one of the biggest credit disasters of all.
Ultimately, credit card disasters aren't the real problem. They're just a painful symptom of a deeper issue – unsustainable overspending.