3 Ways Credit Cards Can Ruin Your Finances

Credit cards can be a helpful financial tool, but they can also cause you lots of headaches.

I'm a big proponent of using credit cards. The right rewards card can help you to earn lots of valuable points, miles, or cash back. Credit cards can also come with great cardholder perks, such as airline lounge access or purchase protection. And they can be a much more convenient way to pay than other methods.

But while credit cards can be a good thing, they also have the ability to do profound damage to your financial life. There are three big ways credit cards can cause you problems.

1. Damaged credit

Credit card companies report your borrowing and paying to the three major credit bureaus, Equifax, Experian, and TransUnion. Card companies tell these agencies whether you've paid on time, how much credit you have available, the ages of your accounts, whether you've recently applied for new credit, and how much credit you've used.

If you've consistently managed your credit closely and paid the bills, these reports are a good thing. They can help you build credit. But if you haven't paid your credit card bills on time or you've maxed out your cards, your credit score can plummet. This could make it harder to borrow money, live where you want, get affordable insurance, or find employment, since many companies and landlords check your credit before doing business with you.

2. Monthly payments you can't afford

Ideally, when you use credit cards, you pay off the entire balance every month. That way, you don't have to commit lots of your future paychecks to covering past spending. You also avoid interest charges, which are often costly with credit cards.

If you end up maxing out a credit card, making even the monthly minimum payments can become unaffordable. This can lead to missed payments and damaged credit. It can also affect your ability to budget effectively, and cause a lot of financial stress.

3. Interest costs that eat up your available cash

Once you start paying interest on credit cards, this reduces the amount of your money you have for other things. Your purchases all become more expensive, because you're also paying interest. And with your hard-earned money going to interest, it can be harder to stay out of debt and accomplish other financial goals.

You can avoid all of these downsides if you don't charge more than you can pay back, and you pay the bills on time. Sometimes that's easier said than done, so have a budget and a plan for careful use of credit cards before you apply for one.

If you're facing some of these issues, don't despair. If you start making whatever extra debt payments you can, it's possible to improve your credit over time, eventually eliminate the interest costs affecting your finances, and instead put your money toward other financial goals.