5 Examples of Bad Debt: What to Avoid When Using a New Credit Card

For many people, getting a credit card for the first time is one of life’s biggest financial milestones. Finally, the credit card holder has the opportunity to make good use of the card’s flexibility, build a solid credit history, and increase their chances of bigger perks in the future.

The typical credit card application online process is also streamlined enough to make it more appealing to sign up for a card like the Landers Cashback Everywhere Credit Card by Maya.

But while there are definitely benefits to using a credit card, and these will understandably be top of mind for a new card holder like you, remember that careless spending can easily lead to financial hardship.

Caught up in the excitement, it’s easy for first-time card holders to fall into common traps that result in long-term debt and financial stress. What may begin as a convenience can quickly turn into a burden if the spending exceeds one's means or if fees and penalties accumulate.

The good news is that with the right approach, you’ll be able to manage your credit wisely and enjoy the perks that come with responsible credit card usage. To guide you there, here are some examples of bad credit card debt to watch out for and tips for avoiding these specific situations: 

1) Carrying a High Balance Without a Plan on How to Pay It Off

Many new credit card holders make only the minimum payment on their monthly bill, thinking that this is enough to manage their debt. However, this is one of the quickest ways to accumulate bad debt. Credit cards issuers typically have high interest rates of up to 3% per month, and any remaining balance that is not fully paid continues to grow due to compounding interest. This means that even small purchases can become costly if left unpaid.

This means that if you owe PHP 20,000 on your credit card and only pay the minimum amount each month, it could take years to fully pay off the balance. You even may end up paying almost double the original amount due to interest charges.

To avoid this, always aim to pay off your full balance whenever possible. If you can’t pay the full amount, try to pay more than the minimum to reduce the accumulating interest. Setting a budget and prioritizing your credit card payments will also help you keep your debt manageable.

2) Using Credit Cards for Non-Essential Luxury Purchases

A credit card makes shopping easier, as it allows you to make purchases without immediate cash on hand. However, using it to buy non-essential luxury items without considering repayment will easily lead you towards financial trouble. Many first-time cardholders fall into the habit of impulse buying without planning how to repay the balance.

In this situation, your outstanding balance will increase along with the interest charges if you don’t pay it off in full. Over time, this can result in significant financial strain for you, which will make it harder to afford essential expenses.

Before making a credit card purchase, ask yourself if you can pay it off in full when the bill arrives. If the answer is no, reconsider the purchase or save up for it instead. 

3) Maxing Out Your Credit Limit

Another mistake that new credit card holders often make is to assume that having a high credit limit means they can spend freely up to that amount. But this isn’t the case, and this mentality often leads to disastrous consequences. A card holder may soon max out their credit score and feel the pinch in the future. 

Remember that banks assess the percentage of your credit limit that you’re using in order to determine your creditworthiness. Using more than 30% of your available credit can lower your credit score over time and make it harder for you to qualify for loans and other financial perks in the future.

And if you end up struggling to make your credit card payments, you might end up relying on cash advances or additional credit lines, further increasing your debt.

To maintain a healthy credit score and ably manage your credit card usage, spend only what you can afford to pay off.

Determine what amount would be a healthy amount to set as your benchmark for monthly credit card spending, as this will make it easier for you to stick to a limit.

4) Ignoring Late Fees and Interest Charges

Missed credit card payments can also quickly lead to the kind of bad debt that causes significant financial strain. Late payment fees will inevitably rack up, and unpaid balances will continue to accumulate interest and make it even harder to catch up.

Consistently missing payments can also damage your credit score, which can in turn affect your ability to secure loans or get approved for future credit cards.

If you don't want to miss any credit card payments, set up calendar reminders to ensure you're always on top of your due date. Make it a point to pay on time or, if it’s possible, a couple of days ahead.  

5) Frequently Taking Out Cash Advances

Credit cards allow card holders to withdraw cash from ATMs, a process known as a cash advance. Although this feature can come in handy in times of emergencies when you need cash, every cash advance you take out will come with high fees and interest rates.

Unlike regular credit card purchases, cash advances start accruing interest immediately, often at higher rates than standard transactions. Banks also charge cash advance fees on the withdrawn amount, which makes it an expensive way to access cash.

If you don't want to fall into bad debt, a cash advance should always be a last resort. In case you frequently need extra money, consider other options, like personal loans.

These will often come with lower interest rates and more flexible repayment terms. You should also make an effort to top up your emergency fund so that you can avoid relying on high-cost borrowing.

Don’t let reckless spending and poor payment habits lead you to long-term debt. Use these tips to be more responsible about your credit and get the best possible spending, saving, and money management experience out of your new credit card.