Credit cards can offer a range of financial benefits, but when you use them wrongly, you may destabilize your finances. When you fail to make on-time payments, you incur late fees. When you carry a balance on your credit card, you increase your interest rates. These are some of the costly credit card mistakes to avoid if you want the best for your financial situation.
But here’s the thing—it’s not so difficult to use your credit card correctly. You can adopt a set of habits to spend responsibly and build good credit.
Hence, this post will discuss some of the major credit card mistakes to avoid. Even if you have racked up a pile of debt, learning about these mistakes can be a starting point to become debt-free and thrive financially.
What Are Credit Card Mistakes?
Credit card mistakes are the wrong decisions you make as you purchase things with credit. For instance, carrying a balance month-to-month or failing to review your billing statement are examples of how you may be handling credit wrongly.
Sometimes it’s difficult to spot these mistakes because they feel like a typical thing to do. You may not realize you’re making a mistake until your credit score is affected and you’re deep in debt.
Reasons You Make Credit Card Mistakes
There are so many mistakes people make with credit cards, and the main reason for this is that they are ignorant. They can make better decisions if they are well-informed. So, here’s what you should know:
1. Spending Without A Plan
It’s not ideal to use credit for your regular expenses all the time. If you aren’t careful, you may be living beyond your means and piling up more debt than you can actually pay. This is why creating a spending plan for your credit card is important.
How’s this possible? You simply have to decide the kind of purchases you are going to make on your credit card and when to purchase them.
When creating a budget, keep common purchases like groceries and utility bills off of your credit card balance. This will enable you to use credit occasionally, thereby reducing your balance. This way, you won’t struggle to pay what you owe at the end of the month.
2. Not Checking Your Credit History
Your credit history holds very crucial information that shows how you handle debt. For people who make on-time payments on auto loans, mortgages, and other types of debt, it’s safe to say they have a good credit history.
Now, checking your credit score is important because it can provide insight into how you are dealing with credit card debt. If you don’t get this information regularly, you will never know the impact of your mistakes. You’ll keep missing payments and carrying your balance month-to-month without knowing that it’s hurting your credit history.
3. Not Understanding Key Terms
When you apply for a new credit card, you may be tempted to ignore the terms and conditions that come with it. However, this is probably the most common reason why people make credit card mistakes.
Make sure you understand certain things such as how your billing cycle works, the difference between statement balance and current balance, and what a grace period is.
You should also figure out how your minimum payment is being calculated and the interest rate offered with the loan.
10 Credit Card Mistakes To Avoid At All Costs
As much as credit helps you to pay for your living costs or emergency expenses, you may be using it incorrectly. Here are some common credit card mistakes to avoid:
1. Not Knowing Your APR And Applicable Fees
When you receive a credit card, it comes along with a cardmember agreement that you may be reluctant to read. But reading this is quite important. If you don’t learn the jargon and review the essential account terms, you won’t understand much about the loan—including the applicable fees.
Check out the key terms below to understand what they mean:
Annual fee: The yearly fee you must pay for holding the card.
Purchase APR: Know as the Annual Percentage Rate, this is the yearly interest rate you’ll pay if you carry a balance month-to-month.
Balance transfer APR: This is the same as the purchase APR most times. The interest rate applies to balance transfers.
Penalty APR: When you pay your balance late, your card issuer may penalize you with an interest rate that’s higher than your usual APR.
Late payment fee: Although some cards waive this fee, you may have to pay up to $29 when you miss a payment for the first time. $40 is charged for subsequent violations made within six billing cycles.
Foreign transaction fee: If you make a purchase outside the U.S., it attracts a fee—typically 3% per transaction.
Balance-transfer fee: If you choose to transfer debt, you will have to pay a 3% to 5% fee.
2. Not Reviewing Your Billing Statement
This is one of the mistakes to avoid while using credit card. Just because you’re able to clear your balance every month, you may not see the need to check your billing statement. You’ll simply assume everything is fine. But if you don’t verify the transactions on your statement to make sure they are correct, you stand the risk of being defrauded.
People who regularly review charges that show up on their account are able to identify fraud early on and correct any inaccurate charges.
It’s also important to check your monthly statement for inaccuracies. If the information doesn’t add up, you should report it immediately. This is how you make sure everything is as it should be.
3. Missing A Payment
If a payment is more than 30 days past due, your credit score can be seriously affected. According to FICO data, you can lose 17–83 points for a 30-day late payment and 27–133 points for a 90-day late payment.
However, bear in mind that missed payments won’t hurt your credit score if they don’t make it past 30 days. This is because payments must be past due for at least 30 days in order for the credit bureaus (Experian, Equifax, and TransUnion) to receive notice of them. But this doesn’t mean you won’t incur late fees or penalty interest rates.
Since this is one of the credit card mistakes to avoid at all costs, it’s advisable to set up autopay—which guarantees that payments are made on time.
4. Only Paying The Minimum Balance
If you are struggling financially, you may be tempted to make the minimum monthly payments. But you shouldn’t do this if you want to get out of debt in time. Your balance will keep growing due to the high-interest rate charged by your credit card company. The best thing to do every month is to pay the highest amount (within your means) to clear your balance early.
To pull this off, you can cut down on your spending. This will enable you to save extra money to contribute toward the credit card balance.
Although it may look like you’re spending “too much” by paying more than the minimum due, this will help you save 10% to 29% in interest per year on any balance you pay off.
5. Carrying A Balance Month-To-Month
This is one of the credit card mistakes you should never make. Many people believe that carrying a balance on one’s credit card increases one’s credit score. This is only a myth. It’s completely wrong.
Carrying a balance month-to-month could reduce your credit score and even make you spend more money paying off the debt eventually. It will result in a higher credit utilization rate—the amount of debt you owe compared to the credit you have available. Meanwhile, it’s advisable to aim for a lower utilization rate.
You may be happy to use a cashback card since it helps you save money, but all your savings won’t matter if you’re spending a lot on interest.
6. Taking Out A Cash Advance
When it comes to credit card mistakes to avoid, this one is sitting pretty at the top. Unfortunately, many people realize this too late. The risky thing about taking out a cash advance is that interest starts accruing on the withdrawn amount. You don’t get a grace period like regular purchases.
Also, a cash advance fee, which can be up to 5% of the advance, will probably apply. In this case, it’s better to resort to another option like an emergency fund. If you don’t have any savings for emergencies, you can find a quick side hustle to earn some money.
7. Maxing Out Your Credit Card
No matter how desperate you are to pay for your expenses, using all of your available credit is one of the credit card mistakes to avoid. This will immediately increase your utilization rate and reduce your credit score.
Always remember that the amount of credit you spend will be reflected by your utilization rate, and, just like you’ve read earlier, it’s better to have a lower utilization rate.
However, if you think your credit limit needs to be increased, and you have the capacity to pay off the bill each month, then contact your credit card company to ask for an increase.
8. Applying For New Credit Cards Frequently
If you don’t want to seem like a big risk to lenders, this is one of the credit card mistakes to avoid.
This is because each time you apply for a new credit card, your credit report records the inquiry. So when lenders see that you have used too many credit cards that you could barely manage, they may not consider you qualified for a loan.
It’s advisable to only apply for credit when necessary—maybe twice a year. Besides, before applying for credit, you can take pre-qualification forms to confirm if you are eligible for a new card. This will prevent you from damaging your credit history.
9. Not Understanding Introductory 0% APR Offers
Have you learned about introductory 0% APR offers? This is usually provided by a lot of credit card companies. The benefit of receiving this is that for a predetermined amount of time, you won’t have to pay interest on balance transfers, new purchases, or both.
These deals can be an excellent method to spread out payments for bills without having to pay interest. However, make sure you carefully read the fine print to find out the specific start and end dates of the introductory 0% APR. You should also understand the terms that apply after the offer expires.
10. Closing A Credit Card
One of the factors that determines your credit score is the average length of time you’ve held credit. This means the average duration of your credit history will be impacted when you close a credit card.
For example, if you have used a card for 5 years and another for 2 years, it means you’ve had credit for an average of 3.5 years. Closing the 5-year-old card will automatically reduce your age of credit to just 2 years. This is why it’s considered one of the credit card mistakes to avoid.
Closing a credit card is generally not recommended, especially if it is your oldest card. Notwithstanding, there are instances in which it may be wise to ditch a credit card. For example, if the annual cost outweighs the benefits of the card, you may want to close it.
Final Words On Credit Card Mistakes To Avoid
Some people have learned to live without credit. They are financially stable and see no reason why they should be in debt or apply for loans. However, this doesn’t mean applying for a credit line is “bad”. As a matter of fact, spending with credit the right way can improve your credit score. As long as you remind yourself of the credit card mistakes to avoid, you’ll do just fine.
Besides, do you think you have made certain credit card mistakes that weren’t discussed here? Share your thoughts in the comments.
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