While credit cards can be valuable when used properly, there are negative side effects associated with them that can have a significant impact on your financial state. Today, companies flood mailboxes with offers attempting to convince you to sign up for a card with them. They usually target college students or young professionals who may not fully understand how credit cards work. Before applying for a credit card, you should be aware of the following: hazards:
A credit card is essentially a loan from a bank with a high-interest rate. An APR (Annual Percentage Rate) is the interest rate associated with the credit card. You pay this rate every month whenever you carry a balance. The average credit card interest rate is 15% a year. if you only make minimum payments, you will end up paying more than you borrowed. To avoid this danger, pay off your entire balance if possible. If not, attempt to pay more than the minimum in order to cut back on interest charges.
Impact on Credit Score
Credit cards have a significant effect on your credit score. Having missed/late payments, opening too many cards at once, and carrying high debt can negatively impact your credit score. If the balance on your card is close to your overall credit limit, it will be reflected negatively on your credit score. To prevent this, it is advisable to use no more than 30% of your credit limit and always pay your bill on time.
Using a credit card for purchases can easily lead to overspending if limits are not set. Credit cards make it tempting to spend more freely without analyzing if your cash flow or account balance allows the purchase. This overspending can lead to debt, which can impact your financial goals. Before securing a credit card, it is critical that you develop a set budget to guide your spending habits and a disciplined mentality to stay on track.