Money mistakes come at a cost
Over 38% of individuals said their lack of financial knowledge cost them more than $500 in 2022, while 23% reported losing over $2,500, and 15% said it set them back by $10,000 or more, according to the NFEC’s latest financial illiteracy survey.
The cost of financial illiteracy has ticked up gradually since 2017 and the pandemic drove those costs to new heights. In 2020, those costs spiked by 27.7%, largely due to pandemic panic. 2022 saw an even larger increase of 31.6% due to record-high inflation and other economic challenges.
“People weren't prepared for the rapid increase in the cost of food, gas, and other necessities in 2022,” says Shorb. “Many people that were just getting their finances back in order after COVID times are now back to struggling to make ends meet.”
The NFEC identified several common money mistakes that cost Americans billions of dollars every year — here are three of the most common — and costly — errors:
The true costs of credit cards
Mistakes made around credit card interest rates and fees cost Americans a whopping $120 billion in 2022.
Credit card companies charge people an annual percentage rate (APR) for borrowing money. Most cards have variable APRs that can go up or down according to specific benchmarks, such as the prime rate.
Carrying balances on your cards can get very costly in the long run, especially right now. The current average credit card APR is 23.39%, according to LendingTree data, but someone with a poor credit score could face an APR closer to 27%. .
If you don’t keep up with your monthly payments, you could end up paying interest on your interest, and your balance can quickly spiral out of control.
Read more: Millennials are sinking under the weight of their debts, adding a record $3.8 trillion to the pile at the end of 2022 — here's how to get your head above water ASAP
If you make your payments on time or pay them in full each month and your credit score is in good shape, you will have lower interest rates available to you when you go to get a car loan or a mortgage — but a crummy credit score can make borrowing of any kind more expensive.
You can usually check your credit score for free and keeping a close eye on it could save you a lot of money and ensure better lending rates in the long run.
As for additional fees, credit card companies will charge borrowers for things like late payments and for cash withdrawals.
Simply asking your credit card issuer about repayment options is worth a try.
“For those in debt, opening a credit card bill can be disheartening and feel overwhelming,” says Shorb. “This emotional response to debt can lead people to inaction. For those with larger revolving debt that carries over month to month, it's important to regularly seek better credit card terms.”
Given the chance, most card issuers are willing to negotiate with you rather than risk you defaulting on the account and not paying anything.
You can also apply for a balance transfer card, which allows you to transfer your current balances to a card with a 0% introductory APR period — giving you up to 21 months to get your finances in order without paying interest before the regular APR kicks in.
Luxuries you can't afford
No matter how far the economy tanks, the allure of luxury goods holds strong and aspirational shoppers are still buying pricey Chanel handbags, Dior jackets, and Cartier watches.
In 2021, U.S. luxury spending spiked 47% compared to pre-COVID 2019, and jewelry spending jumped 40%, according to Bank of America data.
While spending slowed slightly in 2022 — due partly to luxury brands hiking their prices - sales still held up well compared with cheaper brands.
The appeal of luxury goods is problematic for those lacking financial knowledge, the NFEC stressed, especially if they’re spending money on items that they “don’t really need and often can’t afford”.
“Many of us have gaps in our financial knowledge that can be costing us money,” says Shorb. “Identify areas that are taking you further away from your financial goals and dedicate time weekly toward addressing those areas.”
Overdoing it with overdraft fees
Many Americans fall victim to overdraft fees. If you use your debit card to buy something that costs more than you have in your bank account, the transaction may still go through but you’ll be hit with a fee.
According to the Consumer Financial Protection Bureau (CFPB), a typical overdraft fee is around $34. While that may seem minor to some, Shorb points out that “little costs can add up over time”.
In fact, the CFPB estimates that Americans spend $17 billion a year on overdraft and non-sufficient funds (NSF) fees.
Of course, you are expected to pay the fee in addition to the amount you have overdrawn.
Overdraft fees can be easily overlooked but there’s a simple solution for avoiding them: pay attention to your account balance and make sure you don’t spend more than that.
Also, remember that overdraft protection is an account feature you must opt into and pay for. If you have overdraft protection, you could ask your bank to remove your overdraft plan so that you can’t overdraw your account at all — but this means your card could decline if you attempt to make a purchase and you don’t have enough cash in the account.