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The Credit Card Trap: How to Avoid Getting Buried in Debt

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The Credit Card Trap

It’s hard to find anyone who doesn’t have at least one credit card, whether it’s with Visa, MasterCard, or American Express. Credit cards are convenient and make it easy to purchase items without having to carry cash or checks with you be attention the credit card trap: How to avoid getting in debt!

However, credit cards can also be dangerous if you aren’t careful about how you use them. Keep away from more than your credit card limits to protect yourself against debt and losing your deposit once you rent a house or a car.

Know how much you can afford

Figuring out how much credit you can afford is all about looking at your debt levels and your income. The ideal amount of credit that should be in your possession is roughly 10% of your annual income. If you’re making $50,000 a year, for example, that translates into about $5,000. Once you figure out what’s best for you and only apply for that amount, it will help keep you from going overboard with debt accumulation.

You also need to make sure you know exactly what interest rate your card carries—because some cards offer low introductory rates but then jump up after a few months. That’s why you want to finish paying off your account every month.

Choose a low interest rate card

If you’re just starting out and need a credit card, choose one with a low interest rate. You can then keep your spending under control and pay off your balance every month before your interest rate goes up. If you have no choice but to carry a balance from month to month, make sure it’s not more than 30% of your total budget for any given month; that way, if you do happen to miss a payment or two, your debt will stay manageable.

The only cards worth getting are low-rate cards for people with good credit—even then, though, think twice about adding another monthly bill (and fee) on top of all else. Paying an annual fee might be worth it if you travel frequently and want rewards, but otherwise stick with a basic low-interest card.

In fact, choosing an ultra-low rate is almost always better than choosing rewards because cash back offers usually cap at 1% back per dollar spent (or less). Plus, there’s little incentive to use your rewards points since they typically expire after 18 months anyway. So look for a basic card without an annual fee instead. Keep your eyes peeled for deals that waive those fees as well; many retailers offer them as incentives to sign up for their store credit cards.

Pay your bills on time every month

The biggest credit score risk isn’t actually having too much debt or not having any at all; it’s missing a payment for any reason. Paying your bills on time every month is one of, if not, the most important things you can do for your credit score.

Always make sure you have enough money in your account to cover your payments before they’re due, and pay attention when auto-payments are set up so you don’t accidentally miss a bill. (If you don’t have enough cash sitting around, see if you can at least push out that expense until next month.) If you think there might be even a slight chance that you won’t be able to make a payment by its due date, contact your creditor as soon as possible to find out how best to proceed.

Delinquencies hurt more than just your wallet—they also ding your credit score and affect everything from what kind of loans you qualify for down the line to how much interest rates will cost you when applying for them now. Plus, even if paying late doesn’t immediately impact your score, it could still get reported as late—and thus negatively impact it—if left unpaid long enough.

Set up an automatic payment process

When setting up a credit card, it’s important to look into automatic payments. You want a credit card that will work to set up automatic payments to avoid late fees or forgetfulness.

If you don’t have one already, here are some options: If you have multiple credit cards, start with your oldest and/or most established one. That way, if anything goes wrong, you won’t end up with a bunch of unwanted charges on random accounts.

You should also try an account that doesn’t require an annual fee (or any fee at all), since those fees can really add up if they’re attached to numerous cards. It’s easier to manage when there’s just one. Your credit score is calculated by looking at many different factors about your financial history, including how much debt you carry compared to how much money you make. A good rule of thumb is that carrying more than 30% of your available credit limits could be hurting your score.

So, if you have $10,000 in available credit and owe $3,000—that’s 30% utilization—you may not be doing yourself any favors by adding another card with its own limit. Your best bet is to keep total balances under control before adding another line of credit. And as always, paying down existing balances will help improve your score over time too!

Protect yourself against fraud and identity theft

One of your best lines of defense against fraud and identity theft is staying vigilant about your accounts. Monitor your credit card statements for fraudulent charges, read through all correspondence you receive from credit card companies, check account activity regularly and change your passwords frequently. If you do notice any fraudulent activity on an account, immediately report it to your card issuer.

Close credit cards and other affected accounts if you fall victim to identity theft or fraud as soon as possible and file a police report.You may also want to consider placing a fraud alert on your credit report with one of three major credit bureaus. You can do so by contacting each bureau directly or by calling 888-327-4236.

You’ll have to provide certain personal information as well as documentation proving your identity before adding an alert; however, once added, alerts remain active for at least 90 days and can help prevent new accounts from being opened in your name without permission.

Report charges right away if something goes wrong

Credit card issuers will typically be able to resolve a customer service complaint quickly, especially if they know that other people are having similar issues. For example, if you contact your credit card issuer and let them know that you made a purchase with your credit card but didn’t receive it yet, they might help you track down where your order is or even provide additional incentives for using their service.

Don’t wait until after an extended period of time passes before letting them know about an issue. Similarly, paying bills on time is important because timely payments count towards getting better credit scores. If you pay off your balance in full each month, then there’s no reason to worry about interest rates—you can just make sure that you don’t spend more than you can afford. But if you do carry a balance from month to month, then interest rates matter.

As long as you pay your bill on time every month (or at least pay more than the minimum), then there’s no need to worry too much about interest rates—you should get some sort of introductory rate when opening up any new account anyway. Paying off balances early can save money by reducing interest charges, but it’s not going to make a huge difference over the course of one year or even five years’ worth of payments.

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