According to the 2019 Federal Reserve Survey of Consumer Finances, the average American family has $6270 worth of credit card debt. No matter who you are, that’s a lot of money. To make sure you don’t wind up in the same place, here are 10 common credit card mistakes you should avoid.
10 Most Common Credit Card Mistakes to Avoid for Beginners
1. Making Payments After the Due Date
Paying your credit card bills on time is the first and most important metric of financial responsibility. You could say your credit score is based on this one metric. Paying your bills late will not only accrue late fees, it will also reflect on your credit card.
You are leaving an electronic trail for the credit unions to follow. This will come up when you apply for loans or for car insurance, etc. Hence, not paying on time is the most fundamental mistake you can make.
The best way to avoid this is to set an automatic transaction between your debit and credit card. If you can’t do that, you should set a reminder. That way, you will know when it’s time to pay your credit card bill.
2. A Fundamental Misunderstanding of Interest on Your Credit
Credit card interest is a cost for borrowing money. You can avoid interest charges on new purchases if you pay your balance in full every month.
3. Thinking Month-to-Month Balance Guarantees a High Credit Rating
Carrying a month to month balance doesn’t improve your credit score, it hurts it. It just means you have a higher credit utilization rate. This amounts to the debt you have compared to the available credit.
4. Neglecting Your Bill Statement
Checking your bill statement regularly may lead to you to find fraudsters or reporting errors. You can review your monthly statements for these errors and report them to verify that everything is OK. If you actually catch fraudulent activity or errors on your credit card statement, your credit rating may be raised.
5. Neglecting Your APR and Applicable Fees
Remember that credit cardmember agreement you signed without reading? Well, it contains a lot of important jargon. Certain key terms include:
- Purchase APR: Annual percentage rate which is the yearly interest your pay on your credit card purchases.
- Penalty APR: If you pay your credit card bills late, you may incur a penalty rate higher than your regular APR.
- Balance Transfer APR: This is often the same thing as a purchase APR. Interest rate applies to balance transfers.
- Annual Fee: The yearly fee for a credit card holder.
- Late Payments Fee: Paying late on your credit card bills will incur a fee which rises for subsequent violations.
- Balance Transfer Fee: Transferring debt will incur a 3-5% fee.
- Foreign Transactions Fee: Foreign transactions will incur a 3% or above fee per transaction
0% APR Offers
0% APR offers exist where you don’t have to pay APRs on transfers or new purchases. However, the fine print always has details about this grace period. Make sure you find out when it ends.
6. Withdrawing a Cash Advance
Taking out a cash advance is one of the most common credit card mistakes. Only use your debit card for that. Interest will begin to accrue on the cash you withdraw immediately. Hence, you will be losing money very fast. You will probably also incur an advance fee of about 5% on average.
Using a Credit Card to Take Out a Loan
Never use your credit card to take out a loan either.
7. Maxing Out Your Credit Card
It’s a mistake to think that using all the credit on your credit card is a good idea. It’s not like your cell phone plan or your subscription. The amount of credit you use plays into something called the utilization rate. The lower it is the better. Think of the utilization rate having an inverse relationship to your credit score.
If you find that you’re charging close to the limit every month, then you can increase your credit limit. This will be a better alternative to charging close to the limit every so often.
8. Closing Your Credit Card to Improve Your Credit Score
Cancelling your credit cards will not get you a higher credit score. It doesn’t prove that you’re financially responsible or that you have started paying your bills on time. All it does is close your credit card. In fact, it can even worsen your credit rating since you can drive up your credit utilization this way. Leave credit card accounts open until you’re sure that closing it won’t hurt your credit score.
Don’t open multiple credit cards either. That doesn’t do anything for your credit rating either.
9. Spending More to Get Credit Card Rewards
Credit card rewards can get you good discounts on purchases. However, they’re nothing compared to the extra interest you accrue if you can’t pay off that money. You can receive one point for every dollar you spend. However, you’ll need to redeem 5000 points for a $100 discount. That’s not worth it.
10. Not Utilizing Credit Card Perks
While most people are aware that credit cards have benefits, not many people use them. This is not about rewards like 1% discounts or cashback on purchases. This is about price matching services or extended warranties or purchase protections. These are all available on credit cards and very few people use them.
Do some research into what your credit card company is offering you. Don’t sleep on those benefits when the time comes. You can save a lot of money when it comes down to it.
If you watch out for these credit card mistakes you can avoid a lot of problems.
