23 Credit Card Mistakes to Avoid
Are you falling into debt or hurting your credit without knowing it? Learn about the 23 most common credit card mistakes and how to avoid them.
The more aware you are of credit cards’ potential pitfalls, the less likely you will end up with unmanageable debt and the more likely you’ll be able to use them to your advantage (and not that of the credit card companies). CreditDonkey has come up with 23 of the most common credit card missteps you should avoid at all costs.
1. Missing a payment
There are so many reasons to never let this happen. Missing a payment could result in a late fee. It will add to the amount of interest you pay. And it could affect your credit score, which is largely based on your payment history. Making even one late payment on your account could cause your score to drop as much as 100 points. Negative marks, including late and missed payments, can remain on your credit history for up to seven years. This can affect the interest rates you get on loans and your ability to get loans (including mortgages) altogether.
2. Paying only the minimum due
|© Wonderlane (CC BY 2.0) via Flickr|
When you're trying to dig your way out of credit card debt, the worst thing you can do is think that just paying the minimum balance is enough. In fact, it may just barely cover the monthly interest and finance charges if you owe a lot on one card. If you're really serious about eliminating your debt, you have to pay a lot more than that — at least triple that amount. Otherwise, you'll just continue padding the credit card company's pockets without making a dent in your balance.
3. Applying for cards beyond your reach
|stamps © Joel Kramer (CC BY 2.0) via Flickr|
Along the same line as #2, be choosy in terms of cards that you’ll likely qualify for. Applying for a card when you know that the odds of getting approved are slim will only result in disappointment and an unnecessary ding on your report. If you're not sure how creditworthy you actually are, obtaining a free copy of your credit report can point you in the right direction.
4. Not reading the fine print
|Magnifying glass © Kai Hendry (CC BY 2.0) via Flickr|
You’ve heard this one before but it bears repeating, because the credit card info you need can whiz by when you apply online. Just as you wouldn't sign a contract without reading it first, the same goes for a credit card and its terms and conditions. You need to be aware of your responsibilities and the consequences once you start making charges and if you miss a payment. Also confirm (in the fine print) that you have interpreted any balance transfer agreement and rewards programs correctly. The fine print is where everything is spelled out — and if it’s not clear, take a look around to see what others are saying about the card.
5. Getting surprised by a fee
Most fees from credit cards are actually avoidable. Pay on time and you won’t get charged a late fee. If you travel, use a card that has no foreign transaction fee (which is typically 3% of every purchase you make overseas). And if you really hate the idea of paying an annual fee, look for a card that doesn’t have one. Depending on how often they use a card and how beneficial its rewards program is, some credit card users don’t mind the annual fee. It’s a personal choice. Either way, you should be aware of the fee schedule before you sign up so you’re not thrown by a nasty surprise on the billing statement.
6. Overlooking the APR
In addition to the fees, the Annual Percentage Rate (APR) is the other thing credit card holders really need to pay attention to, especially if they plan to carry a balance. Cards have different rates for purchases versus cash advances or balance transfers. They may offer a low APR (even 0%) for a short period as part of an introductory promotion. You will need to know how that will change when the introductory period ends.
7. Taking out a cash advance
|Cash © bfishadow (CC BY 2.0) via Flickr|
Many credit card companies allow you to take a cash advance against your line of credit. You could do this by using the card at an ATM machine or cashing one of the so-called “convenience checks” the credit card company sends you in the mail. Here’s the problem: Cash advances can end up being significantly more expensive than other borrowing options. Not only does the card issuer charge a fee for this convenience, you'll also get stuck paying interest on it, typically at a higher rate than you would for regular purchases. And there's usually no grace period on the interest – so interest starts accruing immediately.
8. Not transferring balances wisely
Transferring your balance from one or more credit cards to a new one is a great way to consolidate your debt and get a better deal on the interest you’ve been paying. While a balance transfer can save you money in the long run, it actually costs you up front since creditors typically charge a fee equaling 3% of the balance. The biggest error you can make here is not doing the math. If you’re carrying a fairly small balance, you may be better off not making a transfer at all. But if you do find it’s worth it and you do take advantage of a promo offer, be sure you can pay off the entire balance by the time the introductory period ends. Otherwise, you’ll have paid that balance transfer fee plus the interest you accrue once the interest rate hike occurs.
9. Getting close to maxing out a card
When you apply for loans or new lines of credit, one of the factors that lenders consider is your credit-to-debt ratio. This is basically the amount you owe compared to how much your lenders are allowing you to borrow (your overall credit limit). If you've got one or more cards that are close to being maxed out, it may give banks and creditors the impression that you're not responsible when it comes to managing your money — and that you may not be able to pay them back.
10. Choosing the wrong type of card
|Money! © Vincent Diamante (CC BY-SA 2.0) via Flickr|
When you're comparing cards, you should take into account how you plan to use it and what benefits are most important. By signing up for the first deal you come across, you could be missing out on something that's a better fit. Avoid cards that don't fit your spending style or that offer rewards you likely won’t ever use. If you like to travel but rarely take more than one trip a year, a card specifically designed for travelers that comes with a hefty annual fee won’t make sense for you. Similarly, even if you intend not to carry a balance but know you will likely will have to at some point, you should consider low interest rates above all other perks.
11. Buying things just because you’ll get a reward
|Cash © 401(K) 2012 (CC BY-SA 2.0) via Flickr|
If you've done your research, rewards credit cards can save you some money if you use them wisely. For instance, you may be able to use your card to earn free flights and hotel stays or cash back on the things you buy. But you should never buy something solely because you’ll get a reward. You should only use these cards for things you would be buying anyway. Otherwise, you’re not actually saving money.
12. Not even realizing you have rewards
Conversely, the other danger that goes along with using rewards cards is losing touch with what they have to offer. Some of them require you to sign into the program once every three months to take advantage of higher cash back amounts on certain categories of purchases. And others, like travel cards, have restrictions like blackout dates that can be frustrating for some people. Since rewards cards usually come with higher interest rates, you want to be sure you’re either using them to their full potential or considering whether you’d be better off with another type of card.
13. Co-signing for someone else
|Take the Walk Tour © Tulane Public Relations (CC BY 2.0) via Flickr|
The 2009 CARD Act has made it much harder for young adults to qualify for a credit card if they don't have income or they're not over 21. Parents and other trusted adults can co-sign, but there are big risks that go along with doing so. When you co-sign a card for someone else or add them to your account as an authorized user, you're putting your own credit at risk if they don't use the card responsibly. Since your information was used to open the account, any activity related to the other person's use, such as late payments or high balances, could reflect poorly on your credit score.
14. Never questioning your interest rate
|© Images Money (CC BY 2.0) via Flickr|
Just because you've got a high interest rate on one of your credit cards doesn't mean you're stuck with it. You could call up the credit card company and try to negotiate a better deal, especially if you have a balance that you’re trying to pay down as quickly as possible. If your card issuer refuses to give you a lower rate, it might be time to start looking around for a balance transfer offer somewhere else.
15. Carrying a balance
|Out Of Debt © Garrett Coakley (CC BY-SA 2.0) via Flickr|
This one is not always possible, especially if you need to make a big purchase or you have a sudden change in job plans. But you should always try to avoid carrying a balance. As it is, according to the Federal Reserve, the average household has an average of $7,200 in credit card debt. When you consider that the average credit card rate is 13%, that's a lot of money being thrown away on interest every month.
16. Signing up for too many cards
|credit © Kaiyan (CC BY 2.0) via Flickr|
Your credit score is based in part on the number of “hard” inquiries you have for new credit. When you have multiple inquiries hitting your credit within a relatively short period of time, it can actually cause your score to go down. Lenders may also view all those hits on your credit report as a sign that you're having money troubles and scrambling to find a way to close the gap.
17. Signing up for a store card to get 10% off your first purchase
|Anna at the not so express lane © redjar (CC BY-SA 2.0) via Flickr|
The cash register is a prime opportunity for retailers to get you to sign up for one of their cards with the promise of a discount, but you're better off just saying no. Retail cards tend to carry much higher interest rates than the typical credit card, so if you don't pay off what you charge right away, it could end up costing you more than if you had just paid cash in the first place.
18. Relying on credit for emergencies
|Taking Down Information © Morgan (CC BY 2.0) via Flickr|
Credit cards can come in handy if an unexpected expense pops up, but they shouldn't be your only source of funding in an emergency. Before you know it, all those little financial surprises can add up to a big pile of debt. You're better off taking steps to build some cash savings so you don't end up having to whip out the plastic every time life throws you a curveball.
19. Closing old accounts all at once
Your credit score is also affected by the length of your credit history. The longer your accounts have been open, the more your score benefits. Closed accounts remain in your credit report for up to 10 years. When you close an older account, your credit score can suffer since your total available credit is reduced. This, in turn, may cause your credit utilization ratio to increase. You want it to be low. This doesn't mean you should continue to keep a card that's charging you high fees, but you'll want to consider the potential impact to your credit before making a final decision.
20. Letting cards become inactive
The flip side of closing credit card accounts is leaving them open but letting them lie dormant. Your card issuer may decide to close the account for you if you've got a zero balance and haven't made any new purchases for an extended period of time. If it's an older account, that can put your credit score in jeopardy. One dormant card may be OK every once in a while, but don’t let multiple cards remain inactive.
21. Ignoring your monthly statements
|Day 736 / 365 - Ski holiday Ouch ( credit crunch debts bills ) © Jason Rogers (CC BY 2.0) via Flickr|
When your statement comes in, you should look at it to make sure that your interest rate hasn't changed, that any payments you've made have been applied correctly, and that there are no charges you don't recognize.
22. Putting your card information at risk
|Home Depot © Mike Mozart (CC BY 2.0) via Flickr|
Credit card security breaches seem to make headlines on a weekly basis these days. Protecting your information means keeping track of your cards, having the numbers in a safe place in case you need to report an issue with the credit card companies, and monitoring your accounts for suspicious activity. Always pay attention to your credit score to see if it has any swings, which may indicate a problem as well (some cards will provide this figure in your monthly statement).
23. Charging more than you can afford
Credit cards come with many benefits — convenience and reward potential are among the top reasons to use them — but there is a big downfall we have not yet addressed. They can tempt you to go beyond your means. This mistake is especially hard to avoid these days when you can rack up large orders online with just a few clicks. Sometimes you don’t even need to enter your info each time, making it even easier to make impulse purchases that you may regret later. It’s hard to avoid impulse buys over the Internet, but it’s that much harder to pay back a ballooning balance that you couldn’t afford in the first place.