Credit cards are utilized by the majority of American consumers to make purchases and build credit. The Federal Reserve Bank of Atlanta found that 79% of American consumers held at least one credit card or charge card in 2020. With the number of active credit cards out there, inadvertent mistakes are bound to happen. Some credit card mistakes incur card users with expensive fees, higher interest rates, and lower credit scores. Luckily, these mistakes are easy to avoid when you understand credit card best practices. Here are ten credit card mistakes and how you can avoid them:
- Applying for too many credit cards
- Not understanding terms and fees
- Only making minimum payments
- Making late payments
- Carrying a balance
- Maxing out a credit card
- Ignoring balance statements
- Using a credit card to pay for medical bills or college tuition
- Taking out a cash advance
- Misusing rewards credit cards
Applying for too many credit cards
There’s nothing inherently wrong with having multiple credit cards, as long as they are used strategically and responsibly. However, applying for multiple credit cards in a short period is something to avoid. With each card application, a hard inquiry of your credit history and track record will appear on your credit report. A high number of hard inquiries temporarily lower your credit score and reflect risky financial behavior. The ideal amount of time to wait before applying for a new credit card is at least six months.
Not understanding terms and fees
No one wants to read the fine print on your credit card agreement, but it’s vital to do so. Before you use any credit card, understand the specific terms and conditions of the issuer. It’s also crucial to understand the fees and penalties associated with a new card. There is an entire language around financial jargon and related terms. Understanding common credit card key terms will better equip you to avoid common credit card mistakes.
Only making minimum payments
Paying the minimum amount on your monthly credit card bill will keep you in good standing. But you should always pay more than your minimum. Only making minimum payments will extend the amount of time spent paying your credit card bill off. It also increases the amount of interest you will pay on the principal. It is best practice to incorporate your credit card payment into your personal budget to pay off a card as soon as possible.
Making late payments
Missing or making late payments on your credit card is an easy way for your credit score to plummet. Late fees are another common penalty from credit card companies if you delay payment. And these late fees often increase as you accrue more late payments. There are a few ways to avoid this credit card mistake. First, you can sign up for reminder emails and texts to know when the due date is approaching. Or check if your issuer offers an autopay option to automatically pay from your bank account.
Carrying a balance
Carrying a balance on a card from the previous month is an all too common credit card mistake. According to Lending Tree, nearly two-thirds of Americans falsely believe carrying a balance will improve their credit score. But when you trying to pay off a credit card, it’s best to have zero balance. This harmful practice increases your credit utilization ratio, the amount of debt accrued divided by your total available credit. Not only that but keeping a balance will also increase the amount of interest paid.
Maxing out a credit card
Every credit card comes with a credit limit, the maximum amount of credit that can be charged to the card. Just by approaching your credit limit, you run the risk of being charged an over-the-limit fee. Similar to carrying a balance on your credit card, maxing out your credit card increases your credit utilization ratio. Experts advise consumers to utilize 30% or less of their available lines of credit. Consumers can avoid maxing out a card by dispersing purchases between credit cards or making lifestyle changes to spend less money.
Ignoring balance statements
Do you go through your monthly balance statements? If not, now is the time to start! Many people ignore their balance statements because they assume they will be 100% accurate. However, that’s not always the case. It’s always a good idea to routinely check for fraudulent transactions and other errors. Always report any discrepancies in your statements as soon as possible. Your balance statement is also a great tool to help track your spending habits.
Using a credit card to pay for medical bills or college tuition
Millions of Americans struggle to pay for medical bills and college tuition every year. But paying for these expenses with a credit card should not be your primary method. Experts say to only pay for smaller medical expenses with a credit card if you can promptly pay it off. When it comes to tuition bills, the majority of universities charge an additional convenience fee that can range from 2-3%. Before making a large, ongoing payment on your card, exhaust your options such as negotiating your bill or applying for financial aid. Not to mention comparing the APR rates of credit cards and federal student loans.
Taking out a cash advance
Credit cards are designed to handle transactions, not to withdraw cash. A cash advance is a short-term loan to take out cash at an ATM. And cash advances have no grace period, meaning that interest will immediately accrue at a higher rate. Each cash advance will also come with a fee depending on how much cash was drawn. If you need cash in an emergency, some alternatives to cash advances include borrowing money from family or taking out a personal loan from your bank.
Misusing rewards credit cards
It’s important to compare your options before deciding what credit card to apply for. Reward credit cards entice consumers with benefits like cash back and frequent flier points. But consumers make the mistake of not taking the time to understand the rewards of their card. This leads to not using a credit card to the most of its potential. It’s beneficial to research and compare types of rewards, expiration dates, and annual fees that come with rewards cards. Likewise, don’t let the rewards from your credit card motivate excessive spending habits.
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