It’s the time of year when ghouls and goblins come out to scare us. While you may not believe in the spooky tales of Halloween monsters, a terror of credit cards is a real thing. According to a recent Bankrate Survey, close to 63% of millennials don’t have a credit card nor do they want one. The primary reason? Fear.
Why are people so afraid of credit cards? The highest-scoring survey answer was debt. Statistically, more millennials prefer death to credit card debt. Many have witnessed close friends and family struggle with debt or have been victims of it themselves, and they now believe credit cards are a slippery slope towards financial despair. While this concern is valid, the reality is that credit cards also have plenty of advantages. To help you overcome your fears, we’ve rounded up the top 10 scariest things about credit cards, along with simple solutions to conquer each obstacle.
10 Scary Things About Credit Cards
1. Debt: Credit card debt managed to hit a record high of $1 trillion in 2017, and the average American owes between $5,155 to $8,515. It’s no surprise that you might be terrified of using credit cards. The consequence of accumulating credit card debt is equally scary. You can face lawsuits, harassment, and even enter bankruptcy. But credit cards don’t have to be synonymous to soul-crushing debt. If you manage them properly, you will be fine.
How to manage credit cards: Pay the balance on your card on time and in full. If you have multiple cards, first pay off the one with the highest interest rate. Spend less on your credit cards, and avoid missing payments by signing up for autopay.
2. Fraud: Chances are high you or someone you know has been a victim of credit card fraud. In 2016, the number of people who reported credit card fraud reached an all-time high of 15.4 million with a whopping loss of $16 billion. These figures are scary, but so is credit card fraud. Even more disturbing is that perpetrators rarely get caught, and when they are, they are usually given a light sentence. The good news is major credit card companies now have a zero-liability fraud policy that limits your personal liability for fraudulent charges to $50. That said, the process of reporting and removing fraudulent transactions can be time-consuming, and the experience can leave you feeling violated. So how can you feel more secure using your credit card for transactions?
How to avoid credit card fraud: The two keys to avoiding credit card fraud is knowledge and vigilance. You need to learn the methods criminals use to get credit card information. Phishing and skimming are two popular ones. You also need to know what to do when you notice a fraudulent activity on your credit card. The best approach is to contact the police, your card issuer, and major credit bureaus.
You should also be vigilant with your credit card. Consider having two cards, one for autopay accounts, and the other for everyday transactions. That way, you won’t be carrying around the autopay card that takes care of important bills. Also, utilize a smartphone-based payment app to protect your account information. These apps use tokenization to replace sensitive information with unique symbols that make them impossible to copy. Finally, only make online transactions on secure websites and not through a public Wi-Fi connection.
3. Overspending: There is an innate need to overspend when you have a credit card. Experimental studies have shown that people are willing to pay extra for the same product when charging it to a credit card as opposed to paying cash. One study found that even the most financially thrifty individuals spend more with credit cards than with cash. Unfortunately, unchecked spending is the first step towards a debt trap. So how can you tamper the urge to spend more with a credit card?
How to avoid overspending: The researchers of the study concluded that perception was the biggest reason people overspend on credit. According to them, most people associate credit cards with consumption, which drives them to finance a consumer lifestyle on credit. To reverse this perception, it is important to use credit cards for specific purchases that you can afford, not for regular living expenses. You should budget your income to meet your basic needs. That way, you will be more motivated to live within your means and not just treat your credit line as bonus income.
4. Credit card decline: For many, the thought of having a card declined in public is scary. Imagine the embarrassment if, after confidently handing your card to a waiter at a fancy restaurant, he comes back to tell you it’s been declined. Unfortunately, this scenario plays out more often than you would think and for several reasons. You may have missed some payments or exceeded your credit limit, or your credit card may have expired. Your card issuer might also block your card if they suspect foul play. So how do you mitigate the situation?
How to handle credit card decline: If you have an alternative means of payment, use it. Otherwise, call your issuer to find out why the card was declined and if the issue can be fixed. If it can’t, then you might have to forego the transaction, give up something for collateral, or call someone for help.
5. Losing credit score: Credit is fragile, and small bad decisions can have significant consequences. Making a late payment, an expensive purchase, or reducing a card limit can negatively impact your credit score. But sometimes even when you have been responsible with your spending, you can notice a rapid drop in your credit score. This is a scary thing because a lower credit rating will mean a higher premium on any further debt you take. So how can you avoid a drastic loss to your credit score?
How to protect your credit score: Get into the habit of checking your credit score. You can request your FICO score, from one of the three major credit card bureaus for a small fee. But many credit card services, such as Discover and Capital One, now provide FICO or Vantage scores for free. You can make use of websites like Credit Karma or Credit Sesame to get a free Vantage score.
If you notice a credit score drop, don’t panic. Try to solve the puzzle of what may have happened. Did you miss a payment? Cancel your card? Or fall behind on taxes? If you did any of these, it would take a little while for your credit score to bounce back. Sometimes it can be an error, so if you are not sure what happened, you can get in touch with the credit bureaus.
6. Losing reward points: Credit card issuers now provide more rewards for using their services than ever. You can rack up points for frequent flyer miles, hotel, and cash back programs. While these rewards can come in handy for a trip or expensive purchase, you may be shocked to find the offer is suddenly gone or rendered worthless when you try to redeem it. Two common ways you can lose your reward points are through returning the purchase that earned you the points or closing an account permanently. You can also lose reward points because of late payments, missed payments, and inactivity on your card. In addition, these rewards lose value. Frequent flyer miles and hotel rewards become more limited, and inflation affects cash backs. So how can you make the most of your reward points?
How to keep your reward points: The best way to avoid losing or devaluing your reward points is to redeem them. Don’t hoard your points for a ‘someday vacation’ or you may be disappointed. Instead, if you see a good bargain for a travel reward, take it. If you have a cash back reward, redeem and contribute it to your saving or even better your IRA account. You can also sign up for auto-redemption, so your points are redeemed automatically.
7. Lower card limit: If you depend on your credit cards to pay off monthly bills, the thought of a cut to your credit limit is scary. A sudden credit slash will reduce the amount you have to spend, but it will also lower your credit score by increasing credit utilization. Credit card companies can cut your limit without any notice if they deem your account risky. This happens when you fall behind on payments, spend more than usual, or make unusual purchases. Sometimes credit can be slashed with no proper explanation from the credit card company. When this happens, what should you do?
How to handle a credit cut: Your first course of action should be to call the credit card company and request an explanation. You can demand your limit to return to the original amount if the issuer offers no concrete reason. If you have suffered some financial setbacks that prevent you from paying on time or keeping your balance at a reasonable level, it’s best to explain the situation to the issuer. Credit card companies often work with customers that experience financial setbacks to restore their credit limit after meeting specific requirements.
8. Higher credit limit: On the flip side, getting approved for a higher credit limit can be terrifying. At first, it sounds fantastic to have more money to spend, but you may wonder if you are responsible enough. Agreed, a higher credit limit can tempt you to splurge, but it also comes with many advantages such as more rewards, a higher credit score, and easier access to loans. So, how do you conquer your fear of a higher credit limit?
How to handle a higher credit limit: Monitor your credit utilization ratio. Don’t use over 30% of the total credit you have available. Also, keep making your payments on time.
9. Missing Payments: A survey by Consumer Expectations show that a lot of people are worried about missing credit card payments. The reason is the harsh repercussions that come with late and missed payments. A few days of late payments can mean fees, credit score drop, and higher interest rates. All these can contribute to debt, which again, is the scariest thing about credit cards. So how can you avoid skipping payments?
How to handle missing payments: Sign up for autopay, so payments become automatic. If you miss a payment, immediately pay the balance in full. Then call the credit card company to explain the late payment and ask for them to reverse the late fees—nine times out of ten, they will. If you can no longer pay your balance, don’t hide. Let the credit card company know the situation you are in. They can create a payment plan for you or provide other resources that will help.
10. Fine print: Credit card companies lace the fine print of their contracts with complex vocabulary presented in dense blocks of text and the tiniest fonts possible. This can make you hesitant to sign for fear of not knowing what you agree to. You also shouldn’t sign any agreement without understanding it. So how do you unravel the mystery of fine print?
How to understand the fine print: You don’t need to understand every word in the contract, but there are important terms you can’t ignore. A few include annual fees, annual percentage rate (APR), average daily balance, and credit limit. You need to know what a contract says on each of these terms.
Here’s a summary of the top 10 credit terms and the implication of each.
This is a yearly fee that banks charge for the privilege of using their credit card. These range from $15 a year to upwards $300. Ideally, you’ll want to choose a card that doesn’t impose an annual fee.
Annual Percentage Rate or APR
Lenders are legally required to disclose the APR, which is a yearly interest rate that includes fees and other costs. Your credit card might also have separate APRs listed for balance transfers or cash advances.
Average Daily Balance
Most credit card companies calculate your average daily balance and divide that by the number of days in your billing cycle, then they multiply that by the card’s monthly periodic rate, calculated by dividing the annual percentage by twelve.
A balance transfer is when you move your unpaid credit card debt from one card to another. Card companies often offer extra-low teaser rates to encourage balance transfers. Just make sure you know exactly when the introductory rate expires so there are no surprises.
Your credit limit is simply the maximum dollar amount that you’re allowed to borrow on a card, and the commonly used phrase “maxed out” refers to charging more than your limit.
This includes the fees associated with using a credit card, including interest and sometimes other surprise fees. Since there might be different finance charges for cash advances and balance transfers, make sure you read the fine print.
This is an interest-free period a lender allows between the transaction date and the billing date for cardholders who do not hold a balance. The typical grace period is 20 to 30 days. Not all lenders offer this courtesy, and those who carry balances on their credit cards are not given a grace period.
If you completely forget about your assigned payment date, you’ll be charged a late fee, which usually amounts to $30-$35. The most practical way to avoid late fees is to arrange auto-pay on your cards.
The minimum amount you must pay to keep the account from defaulting. Usually, it equals 2% of the outstanding balance. To reduce debt faster, pay more than the minimum payment every month and avoid adding new charges.
If you exceed the credit limit on a card, you will be charged a fee. Over-limit fees are generally around $35.
Credit cards are scary if you don’t know how to use them. But knowledge trumps fear. Educate yourself on how to use credit wisely and track your spending. If you manage your finances well, your credit line will pave the way for a brighter financial future. Leave a comment below letting us know if you have experienced something scary when it comes to your credit cards!
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