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Friday, December 3, 2010

Top 3 Credit Card No-Nos

At this point, everyone knows about the credit crisis. Banks gave credit to high risk borrowers who were often completely unable to pay the debt that they incurred.

Whether or not you were (or are) one of these people, struggling to make ends meet as well as pay off a debt which may seem insurmountable, there are some unofficial rules to using your credit card that you should know about. Keep yourself from going into deep debt, or stop from shoveling yourself any deeper, by keeping these top three credit card no-nos in mind:

1. Don't use a credit card to pay for another card. This needs clarification: consolidating credit cards can be an excellent idea. You're able, very quickly, to eliminate hundreds of dollars worth of debt by putting all of the money you owe on a single card, with a single payment (which means that you have less of a chance of missing that payment and incurring additional charges) and a single, lower, interest rate. That's sounds perfect, so what's wrong with using a credit card to pay for another credit card?

The answer is that many people are exactly consolidating their credit cards as they are procrastinating payments. If this sounds like you, do everything you can to stop this terrible spending habit immediately.

For clarity's sake, what you should not be doing goes something like this: you log onto your credit card's website and notice that you have a payment due today. So you pull out another credit card, one which you have more time to pay the minimum monthly bill for, and charge the bill on that.

The problem with this line of thinking is that you aren't ever actually reducing your total debt. Instead, you prolong the time that it takes to pay the debt, and raise the amount of interest that you ultimately have to pay.

2. Don't use a credit card to pay for shady purchases. This may sound obvious, but you'd be surprised at how many people make purchases with credit because they figure that bank will somehow protect them from anything that isn't legit. They might. But betting on something like that when you can just avoid a purchase that seems too good to be true for one which is smart and safe can end up costing you more money than you can afford--and your identity, which is a nightmare to try to recover from. Just ask anyone who's had their identity stolen.

So if you're at a website you're not completely sure is a real company, paying for something at a flea market that you think might be stolen, or otherwise handing that little rectangle of plastic to anybody you think could do anything with your information you don't want them doing, think twice. Your bank probably has policies enacted that will protect you in some way, but what if they don't?

3. Don't use your credit card to earn reward points. You may be shaking your head right now, calling this rule insanity. Especially if you're on a computer that you were able to buy because of reward points, or on a plane whose tickets were purchases with points you earned doing nothing more than using your card for purchases.

But ask yourself: were the things that you paid for to get those points services and goods that you were going to buy anyway? If the answer is a definite yes, then you've used the reward points program to your best benefit, and you've got nothing to worry about. But if, for any reason, at any time, you made a purchase with those bonus points in mind, you've fallen in the trap of bonus point programs.

Every time that you charge your card for something that you were on the fence about, the credit card company makes money, and you lose it. You may feel good about the purchase; after all, a part of you wanted whatever it is you bought, and now you have it, plus you have some bonus points to spare. But if you'd never enrolled in the bonus point program, and you take away all of the purchases you made solely because of that program, then you may have ended up spending far more money on things you would never have bought to get that final reward than you would have buying the reward itself outright.


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