Do you hate throwing away money? So don’t make this credit card mistake

Image source: Getty Images

There are many ways you could benefit from using credit card regularly. On the one hand, most credit cards offer the opportunity to earn rewards or cash back on your purchases. It’s free money that you can pocket without having to do anything other than swipe or insert a piece of plastic (or enter your card number on a website).

Plus, when you shop with credit cards, you get some protection. Suppose you buy an item that you want to return, only the merchant in question gives you a hard time. For a cash purchase, you may be out of luck. But if you’re talking about a credit card purchase, you can contest the accusation and let your credit card company handle this battle.

But while credit cards certainly have their advantages, there is a downside associated with them. And it can be expensive.

You could end up wasting a lot of money

Credit cards give you a spending limit based on various factors, including your credit score and income. But your spending limit doesn’t necessarily reflect how much you can actually afford to spend each month. And if you rack up too many fees and end up with a balance you can’t pay in full, you’ll end up throwing away your money.

Why is that? As soon as you carry a balance on a credit card, you agree to pay interest on it (the only exception being if you have a 0% launch rate on your credit card, but even then you could have trouble with interest charges if your card isn’t paid in full in a timely manner). And so if you don’t like the idea of ​​wasting money on interest, the solution is simple: ignore your credit card spending limit and fix your own.

How do you determine this? Sit down with a budget which maps your monthly expenses. From there, see what you can afford to spend in different categories. You might be able to swing a monthly $100 cable bill and be able to afford to spend $100 a month on carpooling — but only if you keep your restaurant and takeout tab at $100.

Obviously, the specifics of how much you can afford to spend in one category versus another will depend on what your non-negotiable bills look like – things like your rent, utilities, etc. But if you set your own spending limit and stick to it, you’ll avoid carrying credit card balances — and avoid having to pay interest.

Don’t spend more than necessary

Often people are driven to shop when the items they want are on sale. But remember, if you buy an item on sale with a credit card and don’t pay your bill in full, you could negate the benefit of that sale and end up paying too much.

Say an item you’ve wanted for a while normally costs $100 but is reduced to $80. If you charge that $80 to a credit card and carry your balance for a long time, you might end up spending more than that initial $100 when you accrue interest charges. And that doesn’t make any sense at all.

All in all, carrying a credit card balance means wasting money. It is therefore best to avoid this scenario at all costs.

Check out The Ascent’s best credit cards for 2022

We are firm believers in the Golden Rule, which is why editorial opinions are our own and have not been previously reviewed, approved or endorsed by the advertisers included. The Ascent does not cover all offers on the market. The editorial content of The Ascent is separate from the editorial content of The Motley Fool and is created by a different team of analysts. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Comments are closed.