Credit cards can be a valuable tool in the personal finance arsenal, but can be detrimental to your financial health if they’re turning into weapons of personal destruction. Used wisely, they can provide a strong credit rating, peace of mind in an emergency, security when you don’t want to carry cash, as well as cash rewards and other perks. However, used unwisely, credit card debt can be an early step down the path to financial ruin.
Here are some signs you might be getting into trouble with your credit card debt:
1. You are using your cards impulsively, and without a plan.
Impulse buys can start racking up quickly and can lead to a lot of debt with little to show for it. If you hope to be able to use a credit card in case of an emergency, but are spending impulsively here and there on unplanned items, the emergency funds might not be there when you need them.
Solution: Give yourself rules about how much you will spend each month on your card and on what kind of items. If you want to make a larger purchase, subtract that amount from next month’s allowance, or save up and pay with cash.
2. Paying only the minimum amount due month after month.
There might be times when paying only the minimum amount due on your credit card bill is necessary, such as during a costly emergency, at a time when other large bills like homeowner’s taxes are due, or expensive times like starting college. However, making minimum payments, which often don’t even cover all of the interest and fees in one month, should never become a common practice. It’s a way to very quickly get underwater and turn the card from being a useful tool u a debt sink.
Solution: Set your budget so that you are paying at least double the minimum monthly payment. You’ll have more liquidity in your credit line, and you’ll be chipping away at interest costs.
3. You’re spending up to the limit (or close to it) each month.
If you’re spending nearly at your card limits each month, it’s time to step back before hitting the brink of credit card calamity. By keeping your debt amount high each month, you run the risk of going over the limit, especially when the interest is calculated. Going over the limit can lead to changes in the terms of your account, including a higher interest rate or hefty fees.
Solution: Stop using the card for a while, and assess what is behind this behavior: Is it about having too much fun with spending, or is it a sign of other financial trouble? If the behavior is due to the former, then getting spending under control and being more disciplined about impulse buys is in order.
If the problem is that each month, you’re running out of cash and are resorting to using credit cards for things you need, then it’s time to step back and make a plan for lowering your debt, developing a better monthly budget for expenses, and increasing your income.
4. You avoid opening your credit card statements because you are afraid of what you will find.
This is a bad sign: you know you haven’t been careful with your credit card spending, but you haven’t been willing to face up to it. This recipe for disaster could overheat very quickly, and lead to a lot of ramifications if you’re not quite meeting the minimum payment, getting close to your limit, or worse, going over the limit. In this situation, you might be setting yourself up for increased interest rates, a lowered credit limit, and hits to your credit score if you are not careful.
Solution: Face up to your fears and open the bill. Scrutinize your bill, the terms, and make a plan, which includes not using the card for a while. If you’ve had any changes to the terms, you may be able to negotiate with your credit card company if you otherwise have a good payment history.
5. Making late payments or cutting the deadline very closely.
This one might seem obvious, and a payment that is late by one or two days just once might not cause any problems. However, if you’re regularly cutting it close to the deadline and you are scrambling each month to scrape up enough to get the bill in on time, you might be headed down a bumpy path.
Solution: Determine the root cause, and develop a plan. If you’re scrambling because you get paid once or twice a month and the payment date falls just before a paycheck, then work with the bank to see if you can get a new due date set. If not, then it’s time to budget proactively and make the payment with a paycheck period further away from the due date, and not mentally put that bill off to another part of the month.
If the real issue is that you are spending beyond your means, then it’s time to put the card down for a while, tighten up on spending, and get the card paid down a bit. Spend some time looking at what you spend each day, week, and month on everything (housing, utilities, insurance, food, clothing, impulse buys, etc.) and compare that to your take-home pay to get good sense of your monthly expenses and income. Start budgeting better for the payments AND for putting some cash into savings if you are not already doing so.
6. Making big purchases on the card without a plan to pay it down.
Whether it’s an emergency expense like a new refrigerator, or an impulsive weekend trip, if you are going to put large expenses on your credit cards, you need to have a payoff plan.
Solution: Understand that your payments will go up substantially after those purchases, and you’ll need to budget to get the payments down. Otherwise, you’ll be stuck with pricey interest charges and inching closer to your credit limit with each passing month.