There's a ton of credit card mistakes you can make, but the worst one is treating credit cards as money you don't need to pay back.
This mistake often gets people into massive amounts of debt. It's one of the mistakes I've personally made in the past, and I think it's because I was brought up using debit cards (where it pulls the money directly out of your bank account), and credit cards look/feel strikingly similar to debit cards.
Setting yourself up for failure
The advice most people will give you is to treat your credit card like a debit card and don't buy anything you wouldn't normally buy. I do agree with these two points, but I don't think it's practical advice given how psychology works.
Humans are programmed to look for things that make us happy and to avoid things that cause stress or sadness. Unless you have a concrete plan to avoid over spending, you're not going to succeed.
Setting a large goal often leads to failure. For example, at the beginning of the year, my New Year's resolution was to run at least 5 times a week. It's now June and I still haven't gone on my first run. Instead of having a large overarching goal to achieve, try setting small goals every day.
Our recommendation is to use your credit card everyday like you normally would, and spend 1-5 minutes at the end of the day to be aware of your expenses. Bonus points: pay off your credit card in advance to train your brain to treat the card like a debit card.
I know what you're thinking, this sounds really time consuming. If you're watching TV, taking a few minutes during commercial breaks to check your finances should be an effortless task. After you get in the habit of being aware of your spending habits, hopefully it will help you cut back on frivolous spending.
- Be aware of your finances by checking them on a daily basis
- Pay off your credit cards in full every month. We're firm believers of not paying interest and accumulating debt.
- Don't keep a balance on your credit card. If you do keep a balance, it negates the benefits of the cash back/benefits you're getting from the credit card.
What are the benefits of using a credit card if you treat it like a debit card?
Most credit cards offer at least 1% cash back on all purchases, which is more than what you would receive with a debit card. If you're going to make a purchase anyways, why not earn cash back? The no annual fee card we recommend for earning 2% cash back on all purchases is the Citi Double Cash card.
Another reason why people use credit cards is for benefits like extended warranty or travel insurance. Extended warranty is valuable if you purchase electronics and don't want to buy the store's insurance package.
There are a few layers of purchase protection with a credit card (benefits vary with each credit card, be sure to contact your benefit administrator):
1. Chargebacks — If you don't receive an item you purchased or if the item was misleading, you can usually file a chargeback with the credit card company.
2. Loss Protection — If you buy a new phone and you lose it or break it within the first 90 days, you can file a claim with your credit card and they'll replace it.
3. Return Protection — If you purchased an item and you no longer want it after the store's return window, some credit cards will process a return for you within a certain time frame.
4. Extended Warranty — Some credit cards offer extended warranty after the item's manufacture warranty expires.
What do you think is the biggest credit card mistake?