Recently the financial website moneygeek.com asked me to comment on mistakes consumers make when managing their personal credit. Below are my responses:
What do you see as the most common credit mistakes people make?
The most common mistake people make with credit cards is to use those credit cards for non-essential purchases such as clothes, vacations and dinners out, and then not be able to pay off the balances when the statement comes. Most credit cards have very high interest rates. When you consider that you can get a mortgage for around 3% interest, the very best credit cards have interest rates around the 14% range, and some of the cards that are advertised frequently have interest rates of about 20%.
Why do people make these credit mistakes?
People make these credit mistakes for two reasons. First, they are not willing to defer the purchase of non-essential items until they have saved up the cash. Second, they don’t understand the high cost of carrying balances on credit cards. If you have a $2,000 balance on your card, and your interest rate is 22.9% (the interest rate on my own Capital One credit card), and you don’t pay that balance off for a year, you will pay $458 in interest.
What are some strategies you’d recommend for people to break out of these credit mistakes?
Unless you make lots of money and can pay off all your credit card charges in full each month, you need to stop using your credit cards. Start paying cash for everything, and if you don’t have the cash, don’t spend the money. Obviously, in an emergency, you can pull out your card. But in my experience, most charges on credit cards are for things that people could do without, such as clothes, dinners out, entertainment, vacations and so on. If you can’t control your use of your credit cards, cut them up and toss them in the trash.
What else would you like people to know about consumer behavior as it relates to credit?
We live in a society where credit allows us to purchase pretty much anything we want. Whether it be a credit card, vehicle financing, home appliances, home improvement, or school, we can borrow the money to pay for it. The problem with easy credit is that it is also easy for people to take on too much debt. Their paycheck goes to paying debt, so they have nothing to live on, or even worse, their personal situation changes (losing a job, divorce, illness), and they cannot make their payments. Then their credit score is ruined, and they spend their life avoiding collection calls and creditors.
You can check out the original post on moneygeek.com by going to: Biggest Mistakes Managing You Credit.