Handling credit can be very messy. You can try to avoid it, but you will eventually have to deal with credit in some form or the other eventually. As such, it is generally a good idea to develop positive credit habits so that you can ensure that your personal finances have a good chance of improving.
The best way to do this is to simply avoid making really bad credit mistakes. Unfortunately, there are many pitfalls involved with managing credit. The key to ensuring you maintain good credit and avoid bad debt lies in learning these mistakes and circumventing them.
Avoid paying only the minimum
If you didn’t already know, you do not actually have to pay the full amount on your monthly credit card statement. When you receive your monthly credit card billing statement, you may notice a box labelled minimum payment. You might also notice that the number beside it is a lot lower than the total bill. This basically means you have the option of paying part of the bill, while putting off the remainder of the payment for later. Avoid paying this minimum amount at all costs!
Typically, your interest rates will be calculated based on your current balance. By only paying the minimum amount, your credit balance will remain high. This results in your interest payments being higher as well. The end result is a compounding effect on your debt and you may even end up taking longer to pay off your debts in the long run. Aim to pay your balance in full every month to avoid costly interest.
Being unaware of your credit situation
What you don’t know can’t hurt you right? This is a horrible justification to continuously use credit for payments without keeping tabs on your spending. It is not that you can’t use credit for everyday payments, you just need to ensure that you are aware of how much debt you are accruing.
Remember, every time you use your credit card, you are essentially taking out a loan. Because you are not physically handling your money, you can quickly become oblivious to the amount you are spending.
To avoid these sorts of situations, make use of available tools and apps to stay on budget. If you are feeling old school, you can try using the cash envelope system. If not, you can try using the iMoney budget planner and expense tracker to get an instant snapshot of your finances for free.
Buying something that others want
Humans are social creatures. We want to keep up and fit in with our groups. Because of that, you might end up feeling a need to buy something similar to your friend or family group so that you can feel a greater sense of belonging or companionship.
Before rushing out to buy the latest and greatest products to fit in, stop and think about whether you actually need them. If you do, buy with cash if you can afford to. This may make your purchase more fulfilling, and the act of handling physical cash may encourage you to watch your spending.
Not considering the bigger picture
For many people, retirement is a long way off. As such, it may feel much easier to buy a small product now, even if it interferes with your future savings goals. After all, everyone likes receiving instant gratification and the injection of dopamine that follows. We have so many more years to work and earn back that money right?
While it is good to reward yourself from time to time, things can get out of hand if you are not careful. To combat this, write down your long-term goals and keep them in mind when you are tempted to spend on something you do not really need.
Continuously buying “good deals”
Plenty of stores use promotions and bundles to offer you good deals. Sometimes, these are well worth it. But these can also tempt you into buying something you don’t really need right now. Groceries are often a huge culprit, tempting you to buy more food then you need before leaving you with a slowly rotting surplus.
It would be better for you to think about the money you are spending, rather than the amount that you are saving by buying things now.
Not looking at your bank statements
Some people might adopt an “out of sight, out of mind” mentality when it comes to their bank statement. Even those who diligently read their statements every month might get lazy every now and then and skip their statements. However, being hands-on about your monthly bank statement can be a major benefit.
It is entirely possible to lose track of your spending without realising it. The only way to catch this is by reviewing your monthly statements so that you might take the necessary steps to get your finances back on track.
Focusing on multiple debts
As we mentioned earlier, one big mistake when it comes to credit management is to only pay the minimum amount on the debts you owe. However, it is also a huge mistake to focus on paying off the balances of multiple cards and debts at once.
Trying to tackle all your debts at the same time can easily overwhelm you. It would be best to simply focus on handling your debts one at a time, starting with either the highest or lowest interest ones.
Emotional purchasing
We might not notice it, but many people tend to make purchases based on emotion. Of course, there is nothing wrong with buying things that make us feel happy or more secure. However, constantly letting your emotions dictate your spending habits can quickly lead to a shocking credit report by the end of the month.
Read More: How Lifestyle Inflation Hurts Your Finances
Try to find different ways to healthily cope with your emotions instead of spending, be it spending time with family and friends, or getting groceries to cook for yourself instead of always eating out.
Putting yourself down
Morale is also an important part of managing credit. It can be rather demotivating to pay off one of your debts, only to see the remainder that still needs to be worked on. Rather than wallowing in negativity, congratulate yourself in a healthy way. Give yourself some time to work on your favourite hobby or treat yourself to your favourite dessert to keep your spirits high.
Having no reason to pay your debts
Motivation is the key to getting things done. Even with something as important as managing credit, you may tru;y have the intention to stop spending and pay down your debts, but if you lack a reason or motive to do so, you may find yourself slowly missing out or stopping payments entirely at some point.
This is why you should always keep a list of your financial goals close at hand. These goals can help to keep you on track because you will need to get rid of any outstanding debt in order to start working towards your next goal on the list. These goals can be anything such as buying a car, a house, going on an overseas vacation, or even saving for your child’s future education.
