Using credit cards responsibly is crucial for maintaining good financial health. However, many people make common credit card mistakes that can lead to high-interest debt, damaged credit scores, and economic stress. Understanding and avoiding these mistakes, you can use credit cards to establish creditworthiness and manage your finances effectively.
Unlike credit cards, using a debit card for purchases won’t charge interest. However, failing to pay your payment card bill can accumulate credit card debt, increase the interest paid, and lower your credit score. Managing your credit is essential to avoid these financial pitfalls. This article will discuss the top 10 credit card mistakes to avoid for your financial well-being.
Mistake #1: Paying Only the Minimum Amount Due
One of the most common credit card mistakes is only paying the minimum amount due each month. While it may be tempting to pay the smallest amount possible, this habit can cost you significant money in interest charges over time.
When you only pay the minimum, most of your payment goes towards interest rather than paying down your principal balance. That means that even a relatively small balance can take years to pay off and cost you hundreds or thousands of dollars in interest.
As an illustration, suppose you carry a credit card debt totaling $5,000, subject to an 18% interest rate. If you only make the minimum payment of $100 per month, it will take you over nine years to pay off the balance, and you’ll end up paying over $5,000 in interest charges alone.
To avoid this error, consistently pay more than the minimum required amount. Making slightly higher monthly payments can assist in reducing interest charges and accelerating the repayment of your balance.
Mistake #2: Missing Credit Card Payments
Failing to make credit card payments is another severe error with enduring repercussions for your financial well-being. When you miss a payment, you’ll typically be charged a late fee of around $25 to $35. In addition, your credit card issuer may raise your interest rate to a much higher penalty APR, which can be as high as 29.99%.
Late payments can also have a significant negative impact on your credit score. Your credit score is primarily determined or influenced by your history of payments, accounting for 35% of your FICO score. A single late payment can decrease your score by 100 points or more, making it harder to qualify for loans, payment cards, and even housing in the future.
Consider establishing automatic monthly payments from your checking account to avoid missed payments. You can also set calendar reminders to make sure you always pay on time. If you accidentally miss a payment, contact your credit card issuer as soon as possible to elucidate the circumstance and inquire about the possibility of waiving the late fee or refrain from reporting it to the credit bureaus.
Mistake #3: Maxing Out Your Credit Cards
Maxing out your payment cards or using a high percentage of your available credit limit is another prevalent error that can negatively impact your credit score and financial health. After payment history, your credit utilization ratio—reflecting the proportion of credit utilized relative to your credit limit—is the second most crucial determinant of your credit score.
Ideally, it would help if you aimed to keep your credit utilization below 30% on each card and across all your cards combined. That means that if you have a credit limit of $10,000, you should always keep your balance below $3,000.
Excessive credit utilization may indicate to lenders that you’re stretched thin financially and could need help making payments in the future. That could also increase interest fees and make it harder to pay off your balance over time.
Pay off your balances in full each month whenever possible to keep your credit utilization low. You may also request a credit limit increase from your credit card issuer, which can assist in reducing your utilization rate without necessitating a decrease in spending. Just be sure not to use a limit increase as an excuse to spend more than you can afford to pay back.
Mistake #4: Applying for Too Many Credit Cards at Once
Applying for multiple payment cards quickly can also be a mistake that hurts your credit score. When you apply for a new payment card, the issuer will typically look into your credit report to assess your creditworthiness. Hard inquiries may result in a slight decrease in your credit score—each time, lasting up to two years.
Applying for too many cards at once can also make you look risky to lenders, who may wonder why you suddenly need so much credit. That can lead to denied applications or lower credit limits than you were hoping for.
To avoid this mistake, space out your credit card applications over time. Generally, waiting at least six months between applications is best to minimize the impact on your credit score.
However, there are some exceptions to this rule. For example, if you’re trying to take advantage of a 0% balance shift offer to pay off high-interest debt, applying for multiple cards at once may make sense to find the best deal. Just be sure to have a plan to pay off the balance before the promotional period ends.
Mistake #5: Closing Old Credit Card Accounts
Closing old credit card accounts that you no longer use may seem like a good idea, but it can sometimes hurt your credit score. Closing a credit card account results in losing the available credit limit associated with that card, which can increase your overall credit utilization ratio and lower your score.
Closing an old account can also shorten the average age of your credit history, which is another critical factor in deciding your credit score. Card issuers like to see a long history of responsible credit use, so having older accounts on your report is good.
There are some scenarios where closing a credit card account might be necessary, such as if the card has a yearly fee you can no longer afford or if you’re trying to simplify your finances by consolidating your accounts. However, in most cases, it’s better to keep old accounts open and active, even if you only use them occasionally.
If you decide to close an old credit line account, consider alternative options first, such as downgrading to a no-fee version or simply keeping the card open but inactive.
Mistake #6: Ignoring Credit Card Statements and Terms
Ignoring your credit card statements and terms is another mistake that can lead to financial trouble. It’s important to review your statements each month to ensure that all of the charges are accurate and that there are no fraudulent transactions.
If you notice an error or unauthorized charge, promptly contact your credit card issuer to contest the charge. And remove it from your account. Most issuers have a zero-liability policy for fraudulent charges, but you may need to report the issue within a specific timeframe to be covered.
In addition to reviewing your statements, It’s also vital to understand the terms and conditions of your credit card, encompassing the interest rate and fees, rewards program, and other benefits. knowing how your card works can help you avoid costly mistakes and maximize your rewards and benefits.
If your credit card provider changes your account terms, such as increasing your interest rate or reducing your rewards, they must notify you in writing. Read these notices carefully and consider whether the changes affect your ability to use the card responsibly.
Mistake #7: Chasing Credit Card Rewards Irresponsibly
While credit card rewards programs can be a great way to earn cash back, travel miles, or other perks, it’s important not to chase rewards irresponsibly. One common mistake is overspending to earn more rewards, which can lead to high balances and interest charges that outweigh the rewards’ value.
For instance, suppose you possess a credit card that accrues 2% cash back on all purchases. If you spend $1,000 monthly on the card and pay off your balance in full each month, you’ll earn $20 in rewards. However, if you increase your spending to $2,000 per month to earn more rewards but only pay the minimum payment each month, you’ll pay far more interest charges than you’ll earn in rewards.
Another mistake is signing up for a rewards credit card with a high annual fee without considering whether the rewards and benefits are worth the cost. For example, a card with a $500 yearly fee might offer a generous sign-up bonus and luxury travel perks, but if you don’t travel frequently or can’t take advantage of the benefits, the fee may not be worth it.
Select a rewards credit card that matches your spending patterns and financial objectives to steer clear of these errors and avoid these mistakes. Look for a card with a rewards rate and redemption options that make sense for your lifestyle, and be sure to read the fine print to understand any fees or restrictions. Above all, only expend what you can completely repay each month to evade interest fees and debt.
Mistake #8: Taking Out Cash Advances
Another costly mistake is obtaining cash advances on your credit card, entailing significant fees and interest charges. A cash advance involves borrowing funds from your credit card issuer, enabling you to withdraw cash from an ATM or bank using your credit card.
However, cash advances typically come with much higher fees and interest rates than regular purchases. Most payment card issuers charge a cash advance fee of 3% to 5% of the amount withdrawn, with a minimum fee of $5 to $10. Moreover, interest on cash advances typically begins accumulating immediately at a higher rate compared to regular purchases, often around 25% or more.
Cash advances can also signal financial distress to lenders, who may view them as a sign that you’re struggling to make ends meet. That can hurt your credit score and subsequently increase the difficulty of qualifying for loans or credit.
If you need emergency funds, consider substitutes for cash advances, such as a personal loan from a bank or credit union, a payroll advance from your employer, or borrowing from friends or family. You can also work on building an emergency fund over time to cover unexpected expenses without resorting to high-interest debt.
Mistake #9: Not Using Credit Card Benefits and Protections
Many payment cards come with valuable benefits and protections that can save money and provide peace of mind when purchasing. However, many cardholders fail to take advantage of these perks, either because they’re not aware of them or because they don’t understand how they work.
Some expected credit card benefits include:
- Extended warranties on purchases
- Purchase protection against theft or damage
- Travel insurance for trip cancellations, delays, or lost luggage
- Rental car insurance
- Roadside assistance
- Free credit scores and monitoring
To maximize your payment card benefits, read the fine print on your card agreement to understand what’s included. Many issuers also provide online portals or mobile apps where you can view and manage your benefits.
When making a purchase, consider using payment cards that offer the most relevant benefits for that type of transaction. For example, if you’re buying a new appliance, use a card with extended warranty protection. If you’re traveling, use a card with trip insurance and no foreign transaction fees.
Remember that payment card benefits often come with certain restrictions and limitations. For example, purchase protection may only cover specific items or have a maximum coverage limit. Extended warranties may only apply to manufacturer’s warranties of a certain length. Read the terms and conditions carefully to understand what’s covered and what’s not.
Mistake #10: Carrying a Balance to Build Credit
One standard payment card myth is that carrying a balance from month to month can help build credit. That is false and can hurt your credit score and financial well-being over time.
Your credit score considers various factors such as payment history, credit utilization, credit history duration, and credit types utilized. Carrying a balance does not directly impact any of these factors but can hurt your score by increasing your credit utilization ratio.
To establish credit effectively with a payment card, consistently utilize it for affordable transactions and ensure that the balance is settled monthly. That shows lenders that you can use credit responsibly and manage your finances effectively.
Other responsible credit habits that can help build your score over time include:
- Making all of your payments on time, not just for payment cards but for all of your bills
- Keeping your credit utilization low, optimally below 30% on each card and overall
- Maintaining different types of credit, such as installment loans and revolving credit
- Avoiding applying for too many new accounts at once
- Keeping old credit accounts open and active, even if you don’t use them frequently
By focusing on these habits and avoiding the mistake of carrying a balance, you can build a strong credit profile over time and qualify for better future rates and terms on loans and credit.
Conclusion
Payment cards can be a valuable tool for building credit, earning rewards, and managing your finances, but they can also lead to expensive mistakes if not used responsibly. By understanding and avoiding these top 10 credit card mistakes, you should be able to take control of your credit and use it to achieve your financial goals.
Remember to always pay your balance in full each month, keep your credit utilization low, avoid applying for too many cards at once, and take advantage of your card’s benefits and protections. If you make a mistake, don’t panic – contact your issuer immediately and take steps to get back on track.
By using payment cards wisely and developing responsible credit habits, you can enjoy the benefits of credit without the stress and financial burden of high-interest debt. Take the time to educate yourself about credit and plan to use it to achieve your financial wellness goals.