In this series I am covering the 24 tell-tale signs that you could be in financial trouble. Over the next few weeks I will be presenting these signs, how to identify them and tips on how to address the issue.
There will always be something that comes up that you didn’t plan on. You may need new tires or replace a broken item on your vehicle or your hot water heater may go out. That’s ok, things happen and that’s life. Ideally you should have an emergency fund to cover these unexpected expenses but understandably that isn’t always the case. In cases like these it may make sense to use a credit card.
Many people think credit is pure evil and should be avoided at all costs. While yes, going into debt can certainly ruin your life if not handled properly, having the occasional unexpected event require using credit to cover the costs can be fine. The problem is that even though people have good intentions of owning a credit card for emergencies they tend to slip into some bad habits that spell disaster. It is when you develop these habits that you wind up in serious debt problems and can ruin your credit score.
Pushing the Grace Period
What many people don’t realize is that most lenders have a grace period for making payments. The due date may be on the 15th but you could actually have up to a week after that to make a payment and not be charged any late fees. Usually when someone finds out about this grace period for the first time they think it is great because they have extra time to make a payment. Taking advantage of this grace period can lead to problems.
Do you find you are often using the grace period? Do you need the extra time to actually make the payment? Do you find that you are taking the grace period up to the very last day and sometimes missing it because you waited too long and now you are faced with late payment fees? Doing this regularly is a dangerous habit to get into. Over time you begin to ignore the due date on your statement and you think that the last day of the grace period is the actual due date. Grace periods are there for mistakes that happen in life, they are not there to help you delay making payments. Stick to the actual due date and treat it as if anything sent in after will cause a penalty.
Pushing Your Credit Limit
This one happens all too often because it is so easy to do. When you start using credit for the very first time and make small initial purchases it is easy to pay them off. But after a while you may begin to just pay the minimum or less than the full balance. Maybe it is because money is tight, maybe you are treating that line of credit as an extension of the cash you have on hand. Whatever the reason you need to stop this snowball effect before it is too late.
Even a very small amount can accumulate over time with additional small purchases. Making minimum payments will barely cover the finance charges and before you know it you have accumulated a few thousand on that card. Now the outstanding balance is so high you have no hope of paying it off in full and you’re stuck with making minimum payments. You are now stuck in the middle of a vicious cycle.
Pushing the limit is a very bad habit for a few reasons. For one, if the credit was supposed to be for emergencies, with the nearly maxed out line of credit there isn’t enough money available to pay for any emergencies. Second, if you slip up and go over the limit you are socked with serious fees that can just put you even further over the limit. And finally, the ratio of credit used to available credit is a very important factor on your credit report. Running up the balance close to the limits will adversely affect your credit score even if you are always on time and never miss a payment. Don’t get into the habit of pushing your credit limit.
Being Chronically Late With Payments
This one may seem obvious but it still happens. When you fall into debt problems and money is tight it can be difficult to be on time. You may find yourself waiting until payday just to get that minimum payment only to find it is late and you are charged a fee. This is the absolute worst habit to get into. If you are making minimum payments and then having late fees assessed on top of that you could find that your balance on the card is actually growing. This is especially dangerous, not to mention the severe negative marks this will put on your credit report.
It is all too easy to fall into bad habits. What can start out as an acceptable reason for the use of credit can quickly turn into an insurmountable pile of debt. These bad habits, no matter how small can take years to reverse. These habits are difficult to change but the first step is to recognize the patterns you have fallen into and taking action.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.