5 CREDIT CARD RISKS EVERY SMART SPENDER NEEDS TO KNOW

The 5 Biggest Risks of Putting All Your Expenses on a Credit Card

Using a credit card for all your expenses can be a smart way to manage your finances, earn rewards, and build credit—if done responsibly. However, relying solely on credit cards with the plan to pay off the balance in full at the end of the month comes with risks.

Here are the five biggest pitfalls to consider:

1. Overestimating Your Ability to Repay in Full

Relying entirely on your credit card often results in underestimating how much you’ve spent throughout the month due to the number of small purchases and transactions you make. These can add up a lot quicker than you realise.

Larger unexpected expenses, like medical bills or car repairs, can sabotage your ability to pay the balance in full and once you roll over into the following month with a balance, the high interest rates on credit cards make paying off the debt much harder than anticipated.

For many people the reason this occurs is that they have built the habit of paying for their expenses ahead of actually earning the money so there is no other way to pay for current expenses except with the credit card.

Solution:

• Set yourself a weekly spending review to monitor your balance and what you spent that week. Knowing what you have spent already helps you think a little more strategically about where you might be able to reduce spending in the week that follows.
  

2. Falling into the “Revolving Credit Trap”

Credit card companies remain profitable because the majority of people at some point become indebted to the stage that they can now only pay the minimum balance each month.

You are now caught in the revolving credit trap, where you’re only making small dents in your balance while paying significant interest.

Solution:

• Have a budget or plan that identifies clearly for you how much your expenses are each month and then reduce your card limit to reflect this amount. That way you remove the risk of becoming over indebted.
• Ensure you are building an emergency fund as part of your financial plan. Then if any larger unexpected expenses occur you can immediately move funds from your emergency savings account onto your credit card to avoid becoming stuck in debt.

3. Increased Risk to Fraud

While credit cards often come with fraud protection, challenging any charges you know you didn’t make can be both stressful and costly. Especially if a significant amount of your available credit has now disappeared while you try and get the transactions investigated and resolved and you are in that cycle of needing the money to pay your ongoing expenses.

Solution:

• Review your credit card statements weekly for unauthorised charges.
• Set up real-time transaction alerts to monitor activity.

4. Letting Rewards and Benefits drive your spending behaviour

Credit card rewards can be attractive, but chasing points, miles, or cashback often leads to unnecessary spending. You rationalise your purchases as a good thing ultimately costing you more than the value of the rewards.

Solution:

• Accept rewards as a bonus, not a spending motivator. Your spending should always be in line with what you have to spend anyway and therefore any rewards were simply a consequence of that. 

5. Dependence on Credit for Lifestyle Maintenance

Relying purely on a credit card creates a dangerous habit of living beyond your means. At the point your spending exceeds your income and you are now depending on credit to maintain your lifestyle, it’s only a matter of time before you find you have entered a season of debt dependency. This then creates financial stress and leads to long-term financial instability.

Solution:

• Only use your credit card for reoccurring fixed expenses like utilities and insurances and develop the habit of using your own money or cash for discretionary spending which will help you reinforce good spending habits and be more mindful of how much you are actually spending through the course of a month.

A Timely Reminder

Credit cards offer convenience and rewards however they require disciplined management. Being aware of these risks and implementing strategies that can help you avoid the financial pain that follows when you haven't actively managed your credit card isn’t an overnight success.

It requires a clear plan and an even more disciplined approach to get out of debt than what you would have needed to apply in order to avoid it in the first place.

If you want to create a plan to get your credit card back to where it should be and avoid the additional interest it is costing you, you can use this handy calculator to work out a payment strategy.

Or if you prefer, you can always reach out for some personal support, just schedule a Free Discovery Call and we can explore how I can help.