Hello friends, welcome back to the Bulletproof Life blog, where I share tips and hacks to help you make the right personal finance choices and decisions for building a bulletproof life. In this post, I share seven credit card mistakes you have been making which impact your credit rating and finances. They are making you miserable, but you can’t seem to figure out what you are doing wrong.
The first one is:
1. A High-Interest Rate Credit Card
This mistake is one you made at the very beginning when you were applying for a credit card. You accepted a high-interest rate credit card.
If your credit card interest rate is more than 5 or 7%, it is too high, and you need to do something about it; otherwise, your credit card will cost more and take longer to pay off.
If you don’t know what the interest rate on your credit card is, take a minute to check it now. You will find it on your credit card offer letter or in your credit card account details.
I have had coaching sessions with people whose credit cards have 23%, 30% interest rates per annum. During a coaching session with a client, I asked her what her credit card interest rate was. She replied that it was 2%.
As I thought that was a low annual interest rate, I told her so. Then she said, “it was 2% interest per month, not per year!”. I was taken aback.
A credit card with an interest rate of 2% per month is a credit card with an interest rate of 24% interest rate per year, which is an outrageous interest rate on a credit card.
There was no way my client could pay off that card quickly, and I told her so – it was time to move her debt to a lower rate lender!
Imagine having a credit card with a 25% interest rate and £1000 spent on the card. You would be paying an extra £250 interest on that £1000 spread over 12 months. Each time you make a payment, the credit card company will take the interest payment first before putting the rest to the actual debt. If you make only the minimum payment, your payment might go only to the interest portion of your debt, leaving your actual debt unpaid.
How can you correct a high interest card mistake?..
The best way to correct this mistake is to research and apply for a credit card with a lower interest rate. After that, move your debts from the high-interest rate cards to the lower interest rate card. That way, you will pay less interest on your credit and can pay off your card quickly.
A zero interest rate card is my favorite kind of card, but if you don’t qualify for a zero interest rate card, you can go for the ones with a low-interest rate.
Additionally, you can use comparison websites to find the lowest interest rate credit cards and apply. These sites will tell you if you qualify even before your application so that you don’t have to apply for different cards and impact your credit rating. It is advisable to check if you qualify for a credit card before applying for it. Then you should apply for lower interest rate cards and
2. Missing Payments
The second mistake you need to stop making is missing your credit card payment. When it is due, you find yourself forgetting and missing it. Moreover, sometimes life happens, and you don’t have money to make your credit payments. However, you should know that missed credit card payment stays on your credit record for 5 years. This can impact how lenders view you, your ability to assess credit in future and the interest rate offered to you on debt.
If you are trying to get a mortgage and you have a lot of missed payments on your record, it would impact your chances and you may not get the loan at all.
Your credit card has a minimum required monthly payment which is usually very low (say £5, £10, £20) depending on how much you have spent on that card.
How can you stop missing credit card payment?…
So the way to stop missing your credit card payment is for you to set up a direct debit for the minimum required payment to be automatically paid every month when it’s due. You can make additional payments as is convenient for you every month.
I advise that you include an allocation for credit card payment in your monthly budget so that you’re paying more than the minimum. This is to make sure that you are paying off the card and not falling into the trap of a never-ending credit card debt.
3. Making Minimum Payments
Once you are making only the minimum payments, your credit card debt is not going away. The credit card companies are happy with you making minimum payments because you will end up paying twice or even four times more than what you borrowed.
This is because minimum payments rarely cover debts and are usually just enough to cover interests on debts, so your debt stays unpaid or increases over time. This is likely to leave you in more debt for longer than you planned and cost you more.
The only solution to this mistake is to make more than the minimum payment (which is there to just help you avoid missing payment).
Now if you’ve done your budget and can easily afford to make more than the minimum payment, then you should set up your direct debit payment to be higher than the minimum based on your budget.
4. Not Sticking to the Agreement
Your credit card came with a contract which many people sign without reading. However, the contract contains vital requirements which you agreed to comply with when you signed the contract.
Once you don’t comply with these requirements, you may start having problems, such as fines and increased interest rates.
Different cards have different requirements such as 0% on payments, 0% on purchases etc.
It is vital to find and take note of the requirements of your credit card contract and what would constitute a breach of contract.
5. Withdrawing Cash from your Credit Cards
In the UK (I cannot speak for other countries), withdrawing cash from a credit card is a hard No – you mustn’t do it. This is because when you make payments to your credit card, your payment will be allocated to the cash withdrawal only after every other type of debt on the card has been paid.
So the lender will assign your payments to your interest first and then to credit card purchases directly from the credit card before applying it to cash payments. Hence, the cash withdrawal you made on the credit card is going to be the last.
It will cost you a lot of money because you will keep paying interest on it for months and the rate might also be different and higher. You must avoid withdrawing cash from your credit card.
I made this mistake with my first credit card during my college days. I withdrew £50 from my credit card, and it remains the most expensive £50 I have ever taken out in my life because it was the last thing that was paid off on that card.
Some cards even have a different interest rate for cash withdrawal. They will tell you cash withdrawal is 40% per year knowing full well that it is the last thing that will be paid off.
This means that you will keep paying 40% on that cash withdrawal until that card gets to zero. If that card is on £10, you’re still paying 40% on that £10. The card keeps going, and it becomes an endless abusive relationship. This is a mistake you should never make again.
Maxing Out your Card
The fact that you have a card with a £5000 credit limit is not enough reason for you to spend it until you have spent £4999. That is an absolute mistake. I advise that you keep your spending below 30% of your credit limit. So if your credit card has a £10000 limit, try and keep your spending below £4000.
Do not be the person that spends £9000 on a £10000 credit limit card. The more you spend on a credit card, the more it affects your credit rating. So if you have a £10000 limit credit card and you have spent £3000 or £4000, it has no negative impact on your credit rating because it assumes that you are financially buoyant enough to not live off your credit card.
But if you have spent £9500 on that card, that impacts your credit rating because it portrays you as somebody who has financial problems and is struggling financially. This impacts the kind of credit you can get from other lenders.
So if you have made this mistake, try to bring your credit spending below 30%. This is also why paying off your credit card monthly is a good idea so that the 30% rule does not apply to you because you bring the card balance down to zero every month.
Closing Out A Credit Card
If your card usage is below 30% it can have a positive effect on your credit rating. In the same way, a 0% usage would have a positive effect on your credit rating because it shows that you have access to credit but you’re not using it. You are disciplined and also not in dire financial straits. You can be trusted with money.
So if you have a credit card that you have paid off fully, don’t close it out. Keep it somewhere safe because it will reflect on your credit history that you have 0% credit usage and that is fantastic.
After a few years of not using the card, the company itself will close it out for you, and that is fine. Until then, keep your card.
My two cents…
I have now shared with you seven credit card mistakes that you need to stop making. If you have not made any of these credit card mistakes, kudos to you; now you know not to make them.
Also, if you are yet to apply for a credit card, please don’t bother applying for one. You don’t need it, it’s not a necessity. You can do without it.
The Bulletproof journey avoids or keeps debts low. So asides from asset-based debts like a mortgage, I always advocate staying away from debt as much as possible.
If you found the 7 tips in this post helpful, please leave a comment below.
Till next time,
With all my love,