The debate on whether to use or not use a credit card in the world of personal finances continues to be argued by expert writers. A credit card may seem like an easy way to make a purchase, but that little plastic card can cause a lot of damage if not used responsibly. Using your credit card the right way is key to staying out of debt and protecting your credit score. There are plenty of common credit card mistakes out there to look out for and avoid.
According to a credit card debt study done by WalletHub, U.S. consumers have started to return to bad habits when it comes to credit card debt, following a record-setting reduction in 2020 that continued into the first quarter of 2021. During Q3 2021, consumers added $23.6 billion to their tab, following an increase of $44.9 billion in Q2. Furthermore, WalletHub now projects that consumers will end the year with a net addition of $70 billion in credit card debt, which far exceeds the 10-year average of $45.6 billion.
By understanding how credit cards work, you can take advantage of perks and avoid pitfalls. Here are 8 common credit card mistakes to avoid.
1. Paying Bills Late
Missing your payment deadline could come with several consequences. Making late payments can result in a late fee, increased interest rate, and damage to your credit score.
Avoid this mistake by setting a reminder or autopay at least a week before the end of the billing cycle.
2. Making the Minimum Monthly Payment
Paying only the minimum monthly balance on your credit card is a big mistake, this approach increases the amount of interest you pay. You can actually end up paying more than what the purchased item was worth depending on the interest rate. Increasing the monthly payment will help you pay off the balance sooner and save you money.
Set up a payment plan before making big purchases, and always make consistent, on-time payments toward your balance.
3. Maxing Out Your Credit Card
Maxing out your credit limit is very risky. Your utilization rate will be very high, which can lower your credit score. Getting close to your credit limit also puts you at risk for over-the-limit fees and penalty interest rates charges when you exceed your credit limit.
The recommendation is to utilize only 30% or less of your available credit or to come as close to that as possible. Maintain a good credit card balance for a healthy credit score and manageable payment amount or request an increase in your limit from the credit card company.
4. Not Reviewing Your Billing Statement
By not reviewing your credit card statement you risk missing your payment due date or paying less than you should to remain current. Your billing statement is often the first alert to any fraudulent activity on your account.
Be proactive in reading your billing statement, if only to make sure that all the transactions are accurate and that payments have been applied to your account correctly.
5. Getting a Cash Advance
Cash advances are one of the most expensive types of credit card transactions, you will start accruing interest immediately and it’s typically at a rate higher than your card’s purchase APR, in addition, you will be charged a cash advance fee.
In the event you need cash, read the fine print and repay the cashback as soon as you can. Or avoid taking a cash advance period.
6. Not Understanding Your APR and Applicable Fees
Banks and credit cards companies supply the terms and conditions of specific cards at the time the application is completed and when the card is issued. It’s important to review and research important account terms, so you understand all the applicable fees. Some of the key terms to take note of are; annual fees, purchase APR, late payment fee, and balance transfer APR
The process of researching these basic credit card terms may not be satisfying and may even be time-consuming, but if you don’t understand how your credit cards work, you may wind up in debt or farther into debt than you already are.
7. Applying For to Many Cards at Once
The more credit you apply for, the more your points get knocked off your credit score. Applying for too many credit cards within a short period of time raises a red flag to lenders. Similarly, avoid applying for a credit card if you’ve recently taken out other big loans such as a mortgage.
Apply for new credit cards one at a time on an as-needed basis.
8. Closing Your Credit Card
It’s generally not advised to close a credit card, especially your oldest card. Although, there are times when it can make sense to close a credit card, such as when you’re charged an annual fee that isn’t outweighed by the card’s benefits. Canceling your credit card account will seldom get you anywhere with your credit card issuer. It will almost always cost you credit score points as you drive up your credit utilization.
Leave credit card accounts open until you’re sure closing the card won’t hurt your credit score.
The Bottom Line
The above mistakes have been made by many over the years, you can avoid them by paying more attention to the way you use your credit card and carefully considering all the dos and don’ts before getting a credit card. You don’t have to know everything, but you should be aware of how to be responsible with your credit cards.
Have you ever been guilty of making any of these credit card mistakes?