Millennial Money: 5 Credit Card Mistakes to Avoid Right Now
When times are tough, credit card debt can be unavoidable if you learn how to manage credit or are forced to make risky financial decisions due to hardship.
For Lydia Senn and her husband, who are residents of Alabama, this was their reality during the Great Recession in 2008 after she lost her job and he took a pay cut. They relied on credit cards to get by and racked up about $14,000 in debt.
“We paid off our debt in 2014 and decided to live without a credit card until 2019,” says Senn, who documents his financial journey on his YouTube channel. “We don’t want to rack up high-interest debt, so we’re very strategic and intentional in how we use our credit card.”
Having a plan can help you avoid debt or manage it when money is tight. If your situation allows it, consider alternatives before you make credit card mistakes that make it hard to bounce back.
1. DON’T KEEP EXPENSES AS USUAL
Modify your budget if inflation or other circumstances compromise it. With today’s inflation, Senn has adjusted his budget to include rising gas, internet and cellphone charges on his credit card.
“Look at the budget and carefully consider those needs versus wants,” says Katie Bossler, quality assurance specialist at GreenPath, a nonprofit credit counseling agency.
Senn’s grocery bill has gone from $125 a week for a family of six to $225. Lowering that bill is not an option since her husband has lupus and requires an autoimmune protocol diet. “It’s the difference between him thriving and being in pain everyday,” Senn says.
To balance rising costs, it cut spending in other areas and opted for alternatives. Weekly family get-togethers at the local cafe have moved to its terrace. The family now dines out and travels less, and the kids attend a less expensive arts camp.
When reviewing your credit card statement, consider deleting unnecessary purchases or unused subscriptions. Prioritize essentials like rent, utilities, food, and expenses that help generate income. If you’re still financially strained after making changes, consider other options like full-time or part-time work, or finding roommates, Bossler says.
2. AVOID RELYING ON YOUR CREDIT LIMIT
Shrinking your budget can provide savings opportunities that keep you from relying on credit cards. Save what you can, even just $5 a week. An emergency fund is foolproof, but a credit limit may eventually reach its maximum or be reduced at the issuer’s discretion.
Before that happens, request a higher credit limit from issuers when accounts are in good standing. This way, you have credit available as a last resort that supplements an emergency fund. Note that an issuer may perform a “thorough investigation” of your credit after making this request, an action that can temporarily lower credit scores.
3. DON’T CARRY A BALANCE ON A HIGH INTEREST CREDIT CARD
Having a large balance on a high-interest credit card makes purchases more expensive. For credit card accounts rated for interest in 2021, the average rate was 16.45%, according to Federal Reserve data. Some credit card interest rates are even higher at 29.99%.
While a card’s interest rate depends on economic factors and your credit, some cards or institutions offer lower rates that can save you money on outstanding balances. For example, the national average rate on credit cards at credit unions was 11.21% in March 2022, according to data from the National Credit Union Administration.
If you need a debt repayment strategy, a good credit score (a FICO score of 690 or higher) may qualify you for a balance transfer credit card that lets you transfer a high-interest balance on a new card at a lower rate. Weigh the cost of balance transfer fees and ongoing interest charges to identify the best option. The ideal balance transfer card has no annual fee, a low balance transfer fee of 3% or less, and a long enough introductory APR period of 0% to progress on debt.
4. STOP EARNING LATE FEES
If you anticipate a late payment, promptly contact your credit card issuer. Late fees can cost up to $30 the first time and up to $41 after, according to a 2022 press release from the Consumer Financial Protection Bureau.
Some issuers may be able to change your due date, offer financial hardship programs, or refer you to a nonprofit credit counseling agency that provides a debt management plan, depending Bossler. These programs may waive fees or reduce interest rates for a certain period of time.
5. THINK TWICE ABOUT CASH ADVANCES
A credit card cash advance conveniently provides a short-term cash loan at a bank or ATM, but it’s expensive. Interest on the amount of money borrowed begins to accrue immediately and fees may apply.
Instead, consider a personal loan or targeted offers from issuers that turn available credit on a credit card into a less expensive installment loan that puts money in your bank account. For this last option, no loan application or credit check is required.
Credit cards are certainly useful for emergency purchases or to maintain a good credit score. Nerdwallet has some tips on smart ways to use credit cards for yourself.