6 signs you’re headed for credit card trouble

By Emma Lunn

You'd be hard pressed to find someone who has never used plastic for an impulsive splurge, never missed a single payment and never used a card as a lifeline until payday. Yet there are some credit card sins that will land you in financial purgatory -- and that could cause your credit rating to fall from grace.

Here are six signs you're heading for serious credit card trouble:

1. You're using your credit card to pay for essentials, such as food and petrol.

Using a credit card for an emergency once in a while is understandable. But reaching for your card month after month to pay for groceries, bills and petrol is a warning sign.

"Using credit for day-to-day expenses is one of the key signs that you have a problem with your finances," says Una Farrell, spokeswoman for debt charity StepChange. "It will quickly lead to a debt problem as you will find it very hard to repay the debt if you are struggling to pay for everyday essentials without relying on credit." credit-card-sins

Is it ever ok? If you have a cash-back or other type of rewards card and can repay the balance in full each month, using your credit card for essentials like groceries could be worthwhile. The key is to ask yourself if you could afford the purchases without credit. If you can, charge away, and earn rewards.

2.  You're using your credit card for gambling.

For many, gambling can be a fun pastime, but it's important to only gamble what you can afford to lose. Online gambling sites make it easy to make deposits by credit card. But if you're borrowing money to gamble, it's time to stop. If you're finding it hard to break the habit, get advice from an organisation such as GamCare.

Is it ever ok? No. Gambling with borrowed money is never a good idea. Not only can it trap you in a debt cycle, but some banks consider gambling transactions to be cash advances, meaning you'll get charged extra fees and interest.

3. You're missing payments.

You need to make at least the minimum repayment each month on your credit card for each billing cycle. Failure to do so will mean a late payment fee and a notation on your credit file.

Whether you paid late because you're racking up impulse purchases, struggling with a job loss or simply forgetful, missing payments indicates that you are unable to manage credit effectively.

Is it ever ok? No. Late payments are expensive in the short term (fees and interest charges) and in the long term (a poor credit rating can make it difficult to get favourable loan terms).

If you suspect you won't be able to make the minimum payment in particular billing cycle, being proactive can minimise the damage, says National Debtline Spokesman Paul Crayston.

First, draw up a budget (you can find a template on National Debtline's website). Try to find room to accommodate your debt payments.

"If you still can't make the minimum repayment, you should write to your card provider to inform them of your situation and ask them to freeze interest and charges on your account, making clear what level of repayment you can afford," Crayston says. "You should include a summary of your budget."

4. You're getting close to maxing out your card.

When you take out a credit card, the lender will set you a credit limit. However, don't look at this limit as a target. Instead, figure out a way to stay well under it. Ideally, you will regularly use only about 30% of your credit limit.

Is it ever ok? Rarely. If you need to cut things close for a big purchase, pay it off as soon as possible.

"You should only max out your credit cards if you intend to repay the balance at the end of the month," Farrell says.

Still, nearing your limit is risky. Bigger balances are difficult to repay, meaning you're more likely to stay near the limit in the long term. And that looks bad to any creditors who pull your report.

"Having one or more maxed out credit cards where the balances aren't cleared at the end of the month is really a sign that you have a debt problem and is likely to lead to an even bigger one down the road," Farrell says.

5.  You're juggling debts.

If you're using credit cards to pay off overdrafts, taking out payday loans to pay off your credit card or continually switching debts between cards, it's a sign you're in debt difficulty.

"The decision to borrow money should always be taken with one eye firmly fixed on how you will pay it back," Crayston says. "If you don't have a clearly achievable plan for repaying any money you borrow, you should seek advice urgently before borrowing."

Is it ever ok? Sometimes. Moving debts to get a lower interest rate is a shrewd move. Shifting high-interest debt to a 0% balance transfer card, for example, can save you a lot of money if you have a plan in place to pay back the entire balance before the 0% period expires. But if you're robbing Peter to pay Paul, you need to take stock of your debt situation.

6. You're ignoring your credit card statements.

If you can't bear to open your credit card bills or, worse still, are dodging calls from your credit card provider or debt collectors about missed payments, you probably already know you have debt problems.

Is it ever ok? No. Make sure you always read your credit card statement or letters from your provider. The contents might be frightening, but looking your statement in the eye is the first step to taking control of your debt.

If you can't solve your debt problem alone, consider seeking advice from a charity like StepChange or National Debtline.

See related: Understanding your credit card contract: A 5-step guide to the small print, 4 steps for fighting debt denial

Published: 8 February 2013