Common Credit Card Debt Traps

Just as there are many benefits to having credit cards, there are many risks of falling into debt and even a few small mistakes could lead to a longer period of repayments.

This guide looks at some of the most common debt traps and how people can avoid them so that credit card debt never has to be such a big deal.

Interest Free Period

The amount of time you have before you start paying interest is often even more important that the rate on a credit card.

For example, the difference between $1000 on a card that offers 14% p.a. interest with up to 55 days interest free and one with no interest free days is significant. If the card was paid off after a month then no interest would be earned on the first card, but on the second option it would cost $11.67 per month, around $0.40 per day and close to $150 over a year.

Forgetting or not checking the amount of days interest free on a credit card can lead to unexpected debt, which will mean more time paying off the card and even more accumulated interest, regardless of a low interest rate option.

Higher Limit Than Needed

Credit cards offer a great amount of flexibility when it comes to paying off big expenses, but people can end up abusing that convenience when the credit limit is higher than what they really need.

The burden of the cost can weigh less heavily on people when it is not their own money, but in the long run it could take even longer to pay off the amount on the card. When applying for a credit card, opt for a realistic limit that gives just enough flexibility so that a manageable payment plan is always in sight.

Minimum Repayments

Many people see minimum repayments as the required amount they need to pay off their credit card statement every month, which often leads to poor money management.

Only paying the suggested minimum will keep a credit card provider from hassling you, and ward off debt collectors but it can take years to pay off a debt of any amount.

Just paying the minimum on an outstanding balance of just $500 on a card with 16.99% p.a. interest and a minimum payment of 2% per month would take over seven years to pay off and cost $378 in interest, so remember to make extra payments when ever you can.

Sticking With A Bad Deal

As creatures of habit we can often stick with the same credit card for years without considering how rate changes have affected it.

To see whether a current card stands up to other offers, make sure to compare it to other credit card offers – both introductory and ongoing.

You may find that other card offer much better interest rate offers and that switching could be better for your bank account, whether a balance transfer is needed or not.