Four Common Credit Card Mistakes And How To Avoid Making Them
Credit cards offer a great way to buy things you could not afford immediately and sometimes for people who don’t want to carry debt they offer a great mechanism. For whatever reason an individual uses credit cards, here are four commonly made mistakes and how to avoid them.
(1) Negative payment hierarchy
Negative payment hierarchy is a technique used by card issuers to ensure that the debt which carries the least interest on a credit card is paid off first rather than the debt that costs the moth.
For example a card holder who opts for a zero interest balance transfer card and transfers the balance of an existing card to their new card, will find that should they make a purchase on that card and then make a payment on it, the card issuer will use the payment to pay off the debt that carries no interest, whilst the purchase which is racking up the usual rate is left unpaid.
How To Avoid It
There are three ways of avoiding this trap. The first being using a different card to the balance transfer credit card for making new purchases and making sure that the purchase is paid off before the interest free period on the second card expires.
The second method is to choose a balance transfer deal which offers interest free periods on new purchases that last as long as the balance transfer offer period as well, which means there is no portion of debt which is accruing higher interest than any other on that particular card.
The final method is opting for a credit card which offers positive payment hierarchy, a card which lets the borrower pay off the most expensive debt first. (these are few and far between for now)
(2) Incurring Harsh Penalties For Minor Mistakes
Zero interest balance transfer deals are not hugely profitable deals for lenders, though the borrower is charged a percentage to transfer the debt to a zero interest card, lenders look for other ways to generate their profits, and imposing harsh penalties for minor mistakes.
Missing a payment, making late payment or exceeding the available credit limits all give the card issuer the ability to impose punitive costs on the borrower. Minor mistakes can sometimes have the effect of eliminating any benefit that the borrower receives from a zero per cent balance transfer and borrowers should be careful to avoid them.
How To Avoid It
The easiest way to avoid defaulting is by setting up a direct debit for the minimum monthly payment (obviously for borrowers who can afford it, perhaps more, so that less interest charges are paid over time should the debt be carried beyond the initial interest free period ).
(3) Not Keeping Track of APRs creeping up
Despite official interest rates all over the world falling to in some places, multi decade lows, many lenders have quietly been increasing the interest rates they charge to their credit card borrowers.
How to avoid it
Borrowers should be vigilant and should keep an eye on their statements, should they find that interest rates are edging up then they should switch cards.
One way to ensure that APR’s remain low is borrowers should consider taking out a lifetime balance transfer credit card. Essentially, these cards offer a low rate of interest for as long as it takes to clear the balance.
For total rate consistency and peace of mind, choose one that offers a fixed APR, rather than a variable one.
(4) The minimum payment trap
In recent months, several card providers have reduced their minimum monthly repayment levels without explaining to their customers what this means for their debt.
Lenders are not being altruistic when they lower the amount borrowers are required to pay, what they are doing is seeking to extend the term of the loan which results in a longer period the borrower is in debt for and ultimately increases the amount the borrower ends up having to pay as interest.
How to avoid it
If a card issuer or lender reduces the minimum monthly payment (or even if it doesn’t), borrowers should set up a standing order to ensure you’re paying as much as you can possibly afford every month.
The Credit Crisis and Me
It has been a long time since the developed world has experienced a recession, one like the kind that I believe to be coming. I see a little disconnect between what people who live in the worlds big cities are saying and what they are doing. High end restaurants and bars still seem to be full, even if they are only catering to the well to do and its only one session rather than two these days.
Speak to middle class workers and everybody acknowledges that times are going to be tough, and the television news reports are filled with stories about how far people’s fortunes have fallen and the various belt tightening measures individuals are taking.
These signals contrast significantly from what I am seeing and hearing from my own friends and business acquaintances that are spread out all over the world. I have discussed the impending recession with people who live in Hong Kong, Sydney, London, and New York. Remarkably everyone I talk too, that doesn’t work in finance; seem to feel the problem belongs everyone else. That somehow they are going to be remarkably unaffected at least no one seems to be admitting any personal fears to me.
I have the same conversation on a weekly basis with people and I am increasingly feeling outright fearful and whilst my friends, though they are pessimistic about the outlook for the broader economy and everybody else’s prospects, they seem to be remarkably sanguine about their own. At least no one I know has yet expressed direct concern about their own welfare to me.
I wonder if it’s just me, that all my friends and colleagues have done so well in life and are so well entrenched in their careers and jobs that they would be immune to any cull, or that they have already factored in that next year’s bonus isn’t going to be as large. I don’t think that’s it though.
I just turned 34 this year, I and my peers, well we have been working for only about 15 years and before doing that, we were just kids. To be honest if my peer group is not fearful of the future, it’s not our fault, we have been lulled into a sense of security that comes with almost 2 decades straight of global growth, it’s because we have never really experienced or seen the bad times. Not as adults anyway.
It’s been over 20 years since America has had a long and deep recession, one where there is persistently high unemployment, which requires a restructuring of the general economy. The last time Australia had a recession was 1990-1991, and I vaguely remember something about a coal miners’ strike in the UK towards the end of the eighties. Anyone who was around and working for any of those will know exactly what a long deep recession will mean, and people who don’t earn a lot or are blue collar and never had the most secure jobs in the western world to begin with are going to be afraid.
Those of us that were children when times were bad and got college degrees and have benefited from a boom brought about by increased globalization and financial innovation; well we have good reason to see the world through rose tinted glasses. There has been boom doom and gloom quite a few times throughout my working life, but every time remarkably, pay raises were given and bonuses went up for most of my white collar friends, as bad as it seems you can hardly blame us for perceiving that this is everyone else’s problem and not our own.
I think that is going to change quickly though. I don’t think we are going to see a depression where 1 in 3 people are out of work, but I think there are some large scale institutional changes that are going to be taking place. To begin with every company is going to be hit, even in the most defensive of industries.
Once we start seeing pay freezes and job cuts across the board indiscriminately and people we know or even ourselves start losing jobs, it’s going to start hitting home. I’m not saying we don’t feel it already, that somehow, I and the people I grew up with don’t feel a 50% sell off in global stock markets, of course we do. But there is a disconnect between what is happening to western economies and the perceptions we have about its effects on us and our immediate future.
There is a time lag between how our companies and employers are going to react to tightening credit conditions and a reduction in consumer spending. Sunset industries will have to die and bloated industries will have to be cut, unemployment is going to be persistent, jobs out of college are not going to be guaranteed and no one’s position is going to be safe. This is not something we are prepared for, how could we be, and personally I am more than a little afraid.