Friday, September 14, 2012

Four Credit Card Mistakes that Can Cost You Money

There are four major mistakes most people do with lines of credit that keep them from increasing their wealth. It is these four mistakes the smart wealthy do not make, which make them wealthier.  Start by checking the fine print of your offers, checking your purchases, paying down your debts, and breaking these five bad habits.

It's In the Fine Print

Credit card companies use flashy advertisements to grab your attention. In reality, the fine print notes that those rates are introductory, often ending in as little as a month or your next bill. Cash-back is also not as good as it seems, many companies use it as a marketing ploy, but the fine print usually dictates how it can be spent, and that's usually only with them and their partners. Credit card companies are not out there with your best interest at heart, they are there to make money, and lots of it. Read the fine print with scrutiny and ask:

· When do the introductory rates end?

· What are the normal rates?

· What causes rates to go up again and how much?

· Do the rates fluctuate?

· Do rates increase for late payments?

· Do rate changes depend on your credit score?

· Can they charge compound interest on late payments?

· Can they charge extra fees?

· Can they charge you for paying off your bill?

Additionally, we need to know if they charge for using the card, where they charge, and if the card is accepted only at certain stores or venues. Also, many companies charge if you do not keep a minimum debt on the card, which is a bust for those who pay off their bill each month.

Using Credit as Investment Funds

Many of us begin our credit card debt by purchasing consumables. This is the absolute worst way to waste the loan the credit card companies give us with the little card. Consumables include small purchases such as food, drinks, movies, services, and other random things which immediately lose their monetary value upon purchase.

Those who look for ways to increase their wealth use credit cards as a form of investment. They also use it as an emergency fund and only use it to buy consumables if they know for certain they can pay those off on their next bill, before they get charged interest. For the wealthy, the investment option means they use the money to generate money, thereby offsetting the interest charges.

How does that work? It's simple, by using the line of credit to purchase things that appreciate in value, or increase in value over time more than the interest rate costs them. They create an income source that also is tax free until they sell that item. Usually this amounts to antiques, rare cars, properties, and business investments.

Credit cards are not free money. This is a loan from a business to you. If you do plan to use it for everyday expenses, be forewarned. Only do this if you have the cash in your bank account to pay off the purchases before the next bill in order to earn points or other rewards. And check the fine print, so see if non-carried over debt actually counts for that.

Paying Down the Debt

If you simply pay down the minimum monthly balance and let interest accrue on the remainder, you set yourself up for increasing debt. The minimum payment is only for covering the interest, thus creating an income for the credit card company.  The larger your charges are on your account, the more interest they earn from you each month.  How do we end this cycle?

1. Start by stopping credit card use. If you don't have cash for food and beverages when out, learn to make time for them at home. Which also means you will be saving money by doing so.

2. Pay down the minimum monthly payment, plus as much as you can on the bill. Can you cut some expenses over the next few months and reduce your credit card debt by half or more? Create a financial plan that enables you to do so.

3. Read the fine print on all of your current cards and calculate how much interest you are paying and how much of that interest makes up the monthly payment. Then decide if you can consolidate them into a lower-interest card, take out a lower interest loan to pay them off, or pay off smaller cards with one card to eliminate multiple  debt avenues.

4. Pay off cards with the highest interest rates first and those with the highest balance second. Work to eliminate as many credit cards as possible from your debt and wallet. Eliminate any cards which have hidden fees, monthly charges, or fluctuating interest rates. The remaining cards should be used for a) emergencies only [like breaking down and needing a tow truck, or emergency medical care], and b) investment purchases.

Five Mistakes Never to Make with Credit Cards

These five mistakes are what separate the middle class and wealthy from the broke and barely surviving financially. Making them, especially repeatedly, will end us up in a mess of financial trouble that results in the inability to get an apartment, buy a house, lease or buy a car, get insurance, and sometimes, even be denied certain jobs.

1. Using Cards with fluctuating interest rates

2. Using cards with monthly charges

3. Using cards to buy consumables

4. Paying the monthly minimum balance, late payments, or skipping payments

5. Allowing non-investment debt to increase monthly

By being smart with our borrowed money we can improve our chances of financial success, our credit score, and our purchasing power. Thinking like a rich person when it comes to credit card debts and other loans may not make us rich or famous, but it will increase our personal financial wealth. The feeling of empowerment that comes from being debt free is amazing, it boost our self-confidence and our bank accounts. By being smart with how we use borrowed money, we will work to earn, not work to earn money for our debtors.

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