As the world rapidly becomes more technologically advanced, spending money is becoming easier without even realizing it. With all of these new ways to purchase things, you might feel like credit cards are a necessity in today’s society. They are easy to use, accepted everywhere, fast, and secure.
But as we all know that good things often come with a price. And the same thing goes with credit cards as well. Credit cards might be easy and safe to use, but there are risks involved with them as well.
Anything can happen, from penalties to high-interest rates, if you don’t pay your credit card bills on time. So if you are planning to get a credit card, you have to make sure you are aware of the risks involved.
So let’s explore the different risks involved in having or using a credit card so that you can avoid these vulnerabilities in the first place.
Seven risks involved with Credit Cards
1. Overspending:
First and foremost, credit cards make it easier to spend money than actually having the cash in your hands. That’s why money experts suggest you should never shop when you’re hungry.
It will be way too easy for you to waste your money on unnecessary things. When you swipe your credit card, there is no immediate pain or discomfort that you will feel in your pocket. It’s just too easy to swipe and spend and then end up in debt.
How to avoid overspending
To avoid overspending when you use your credit card, always check how much money is in your account. Also, try to limit the number of times you swipe your card in one month. Use it only when it’s necessary or in emergencies.
2. Late fees:
Another problem with credit cards is late fees. These fees are different for each bank, but usually, they do not exceed $25 if you pay your balance within the first ten days of the due date.
If you happen to miss this period, you will incur a late fee of around $35-$45. And if you continue missing your deadlines after 30 days of the due date, you will be charged a higher interest rate.
How to avoid late fees
To avoid paying late fees for your credit card:
- Make sure you always pay on time.
- Set a reminder on your phone or calendar, so you can never miss a payment.
- Try to pay more than the minimum balance if you want to avoid paying extra fees.
3. High-interest rates:
Credit card companies make money from their customers by charging them high-interest rates on their balances. On the other hand, Merchants have to pay between 1% to 4% for accepting credit cards.
So you might end up paying more than what the item actually costs. Unless you have a 0% interest credit card or a cashback reward card, you should always use cash or debit cards when shopping.
How to avoid high-interest rates
To avoid high-interests rates on your credit card, always pay off your balance in full at the end of each month. If you cannot do that, then try to lower your expenses by spending less on unnecessary things. Also, find a card that offers either a 0% interest rate or as low as possible.
4. Getting into debt traps:
Some people get into the habit of using their credit cards for everyday purchases like groceries, gas, etc. That makes it easy for them to spend more money than they earn monthly.
So if you are unable to pay off your balance each month, then there is a possibility that you can fall into debt and end up in trouble.
How to avoid getting into debt traps
To avoid getting into debt traps, always pay your balance on time and never exceed your limit. Keep track of what you are spending each day so that you can avoid reckless spending. Also, make sure you spend less on unnecessary things and save up for emergencies.
Read More: Advantages and Disadvantages of having a credit card.
5. Identity theft:
Once you provide your credit card information to a retailer or service provider, they have full access to your account. So if one of those companies gets breached, you will be putting your identity at risk.
Someone can steal your credit card details and start using them themselves without having any problems. They may even use it for unlawful purchases on the internet.
How to avoid identity theft
To prevent your credit card details from getting stolen, you should always get your credit cards only from reputed lenders. Also, when you purchase something, make sure the retailer is authorized and well known to the public like Amazon, eBay, etc.
Never use your credit card in smaller shops because your card details are highly likely to be stolen.
6. Losing your credit score:
If you fall behind on your credit card payments, that will reflect poorly on your credit score. Your score will decrease, and your interest rates may go up, or you may even be declined from getting credit or a loan in the future. Even if you just pay the minimum amount due every month, it can still affect your score over time.
How to avoid losing your credit score
To avoid losing your credit score and damaging it over time, always try to pay more than the minimum amount due each month. If you can’t afford to pay that, make sure to reduce your expenses as much as you can. Also, paying your credit card bills on time can improve your credit score over time.
Read More: How Credit Cards Can Improve Your Credit Score.
7. Can lead to bankruptcy:
Suppose you start missing your credit card payments, and you can’t afford to pay even the minimum amount due for a long time. In that case, it could potentially lead to bankruptcy.
Your credit score will be extremely low, and there is a possibility that you won’t be approved for any other form of loan in the future if this happens.
How to avoid bankruptcy
To avoid bankruptcy, always pay your credit card bills on time and don’t exceed your credit limit. Try to purchase or invest in other assets that can help you make extra money each month if there is a chance of you falling behind.
Tips on Handling a credit card
Credit cards may come with risks, but if you stay organized with your finances and use them carefully, they can be your best friends in a lot of situations.
Here are a few things you can try to avoid the risks in the first place.
1. Avoid staying in debt:
Make sure you never spend more money than what you have available. It is advisable to pay off your balance in full each month when buying something big like appliances, furniture, etc. The interest rates will be higher when you carry a balance.
2. Try to maintain an emergency fund:
If you have trouble paying off your credit card bills, it is good to have an emergency fund. It will help you pay off your credit card debt without going into bankruptcy and ruining your life in the process.
3. Take advantage of the rewards and cashback:
If you make the most of the benefits and cashback, then credit cards can be a great way to save a few bucks on every purchase you make. You can get lower APR or membership discounts and also earn cashback on your purchases. Try to redeem these benefits as soon as you can because they don’t last forever.
4. Make sure you pay your credit card bills on time:
If you pay your credit card bills on time, it will help you improve your credit score. It is advisable always to pay more than the minimum amount due each month because that can save you thousands in interest alone if done correctly.
5. Use your credit cards carefully:
Lastly, make sure you use your credit cards carefully. It is recommended to check your credit card statement regularly and only use them for emergency purposes. If you start using your credit cards to buy unnecessary things, that can take a toll on your ability to pay off the balance each month.
Bottom-Line
Credit cards are one of the best financial tools only if you use them wisely. It is advisable to stay organized with your finances and spend within your means.
If you manage to pay off your credit card bill before the due date, you will improve your credit score over time.
