Forming good credit habits is an important step toward improving your personal finances. The average American holds an average of $5,315 in credit card debt. Combined with mortgages, student loans, auto loans, and other outstanding payments, the average total debt per person in the United States is $92,727
Although debt is widespread, here are some common mistakes you can avoid when using credit in the future.
- Paying only the minimum amount
Credit card companies may seek to convince customers that it’s a good idea to make only their minimum payment every month. Often, a borrower is required to pay just 2% of a credit card bill.
Only about 33% of Americans pay off their credit balance completely every month. But whittling down your debt over a long period enables credit card companies to make more money because interest accrues over time.
Paying more than the minimum balance will ultimately cost less and give you greater control over your finances. Aim to pay your balance in full every month to avoid costly interest.
- Being blissfully unaware
“Pain of Paying” describes situations where it pains a customer to use cash rather than a credit card. But when you use a credit card or take out a loan, you don’t physically handle your money and can quickly become oblivious to the amount you are spending.
To avoid this mistake, try putting cash in envelopes at the beginning of every month and only spending what’s in them. When you run out of the allotted amount, refrain from buying. You can also delete your stored card information from online stores, so it becomes more difficult to make a purchase.
- Buying Something Because Others Want It
You may buy things on credit to keep up with your family and friends or even compete with other people. For example, have you ever gone to an auction and bid higher and higher because other people around you were bidding, too?
A psychological concept known as social facilitation describes the way one’s behavior changes depending on his or her social surroundings. When it comes to buying, social facilitation can lead you deeper and deeper into debt.
Before rushing out to buy the latest products, stop and think about whether you actually need them. If you do, buy with cash to make your shopping experience take on more financial meaning.
- Losing Sight of the Bigger Picture
It may be easier to buy a small product now, even if it interferes with your future savings goals. That’s because the human brain has been trained over millennia to appreciate instant gratification.
To combat this, write down your long-term goals and keep them in mind when you are tempted to spend.
For instance, if you want a pair of expensive shoes, remind yourself that you are not buying them because you prefer to pay off your debt and buy a house a year from now instead.
- Buying Something Because It’s a “Good Deal”
You may be tempted to buy something because it’s a good deal, even if you never planned on purchasing it in the first place. For example, if a blender normally costs $150 but is on sale for $100, you might convince yourself it’s a great deal, even if the $150 price point was completely inflated.
Instead of concentrating on the $50 you’re saving, think about the $100 you’d be spending. Then, you might hesitate before purchasing something that’s a “good deal.”