As long as you use them responsibly, credit cards are useful tools in your financial arsenal. Nonetheless, so few borrowers understand the damage they can work upon their financial health by abusing them. Here are five common credit card mistakes you are probably making – and a few reasons why stopping them now is vital to your financial future.
Making minimum payments
Let’s be honest: you can, but that doesn’t mean you should.
Making minimum payments is a rampant mistake among credit card users, and it lands so many of them in hot water. By making only the minimum payment every month, before you know it, your monthly payment might only cover the interest owed – forget about the principal balance.
If you get into the habit of only making minimum payments, you might be surprised to check one day that the balance you owe has mushroomed into virtually unmanageable amounts. While it is better to prevent this from happening, if you do find yourself facing credit card debt you cannot figure out how to pay down on your own, a debt relief company can assist you.
There are various ways to pay off your debt, whether that is debt consolidation, credit card consolidation, or some other form of debt relief. However, before it gets to that point, be smart with your credit and pay your balance off in full, every. Single. Month.
Maxing out your card
It’s like free money, right?
Wrong.
Simply stated, viewing your total available credit as your spending capacity is dangerous. If you charge up to your credit limit (i.e., “max-out” your card), you shoot yourself in the foot by:
- Hurting your credit score (blowing your utilization ratio)
- Exposing yourself to penalty fees
- Compounding your interest rates
- Encouraging you to accrue MORE debt
Like making minimum payments, maxing out your credit card is a dangerous mistake to make as it can lead you into a debt spiral. Keep that credit utilization as low as possible and only spend money that you actually have – not what your credit limit tricks you into thinking you have, but don’t.
Thinking it is OK to miss a payment once in a while
It is ok to miss a payment once in a while, right?
Once again, wrong!
Perhaps you have not yet set up automatic payments or you prefer to pay your bills yourself. Maybe you pay your bills late sometimes because you have to wait for your paycheck to come. Even if you have a valid reason, it is a real risk to your financial life to miss even one credit card payment.
If you are less than thirty days late on a credit card payment, your credit card issuer will not report the late payment to the credit bureaus, but you may still face late fees.
If you are thirty days or more late on a credit card payment, the credit card issuer will report that missed payment to the credit bureaus. Once they have this information, your credit score can drop by as much as eighty points for just one missed payment and that missed payment will remain on your report for seven years.
Because your payment history is such an important and long-lasting factor on your credit report, do not make the common mistake of missing even one payment. Do what you can to keep track, whether it’s setting alerts on your phone, paying your bills at the same time each month, or even engaging a financial accountability partner to check in on you to make sure you’re staying on top of your payments.
Closing your credit account
It feels great to finally pay off a credit card balance in full. After congratulating yourself for paying off your debt, your next step might be to immediately close that credit card account so you are not tempted to incur more debt. However, closing your account, especially if you have had the account open for a long time, is Common Credit Card Mistake #4.
An important factor in determining your credit score is the length of time for which you have had credit. The longer your credit history, the better, and when you close a credit card, the average age of your credit cards decreases. For this reason, it is usually advisable to keep your accounts open, even if you’ve stopped swiping your cards. As always, exceptions apply: If your card carries a high annual fee you no longer want to pay or if you would be tempted to spend on the card if kept open, then, by all means, shut it down.
Ignoring those pesky terms of use
Remember what happens when you assume? There’s just no room for that when it comes to knowing the Terms of Use on your credit cards. Do not make the mistake of assuming you know the terms of your credit card, or that the terms of all of your cards are the same. Take some time and review the agreement you have with each credit card issuer.
Key things to look out for include:
- Annual fee amount;
- APR (annual percentage rate) – the interest rate charged when you carry a balance;
- Penalty APR – the higher interest rate charged if you pay your balance late;
- Late payment fee – the amount charged every time you make a late payment; and
- Foreign transaction fees – the fees (usually three or four percent per charge) charged when you purchase something outside of the U.S.
By knowing these various fees and charges ahead of time, you will be more likely to avoid making the mistakes above, such as incurring late fees or paying an annual fee on a card you no longer use.
Have you made any of these mistakes?
Do any of these mistakes sound familiar? If so, hopefully now you will know what not to do and make some simple changes to how you use your credit cards to avoid unnecessary penalties and fees.
