Credit cards can be tricky, and it’s common for people to make mistakes when using them. The key is to learn from these mistakes and to avoid making them again.
With that in mind, we’ve compiled a list of the most common credit card mistakes to help you learn from the missteps of others. So read up and find your way to sturdier financial footing.
Not Having a Credit Card: Credit cards can lead to problems when misused, including credit score damage and untenable debt, but that is no reason to avoid them entirely. Credit cards are by far the most accessible and effective credit building tool available to consumers, since you don’t have to incur any debt or make any purchases in order to add positive information to your major credit reports. As a result, if you’re unsure about your ability to spend responsibly, just lock your card in a safe or even cut it up.
Opening a Credit Card Unnecessarily: Each time you open a credit card, your credit score takes a slight hit, the effects of which last about six months. This should not discourage you from opening a card if you need it; you just don’t want to go overboard – especially soon before you’re going to need a polished credit score (see below).
Opening a Credit Card When You Need a Good Credit Score: Since opening a credit card causes slight credit score damage, you should avoid doing so within six months of applying for a loan or buying a car.
Getting the Wrong Type of Credit Card: While many people get distracted by rewards, rewards cards aren’t right for everybody. If you have credit card debt, get a balance transfer credit card. If you’re planning a big ticket purchase, find a card offering 0% on new purchases. If you have limited or bad credit, get a credit improvement credit card. Only if you do have above-average credit and you pay your bill in full each month should you really worry about rewards.
Opening the Wrong Rewards Card: You should only get a travel rewards credit card if you fly at least 30,000 miles each year or spend at least 20 nights in hotels. This ensures that you will be able to efficiently accrue rewards as well as redeem frequently enough to avoid rewards devaluation. If you can’t meet one of those benchmarks, get a cash back credit card with the rewards structure that best suits your spending habits.
Using a No Preset Spending Limit Credit Card: Many people think NPSL means that a card has no limit. However, all it really means is that a card’s spending limit is determined on a month-to-month basis and that the issuer will not inform you or the major credit bureaus of exactly what it is at any time, thereby creating the potential for your card to get unexpectedly declined and for your credit score to fall because of deceptively high credit utilization.
Thinking College Students Can’t Use Credit Cards: The CARD Act has confused a lot of people into thinking that most college-age consumers cannot use credit cards. They believe the law requires you to be at least 21. That’s not the case, however, as you merely have to be 18 to get your own credit card and the CARD Act merely imposed the same restrictions on young applicants as everyone else: You need enough independent income to cover a card’s monthly minimum payment.
That’s good news too because it’s important for college students to establish credit in their own names in order to save on loans and insurance premiums after graduation as well have the ability to rent an apartment or lease a car and face no unnecessary restrictions in terms of the types of jobs they’re eligible for. You can check out our editor’s picks for the Best Credit Cards for College Students for an idea of what offer to apply for.
Paying to “Repair” Your Credit: There really is no quick fix to credit building, no matter how much or whom you pay. The companies that advertise fee-based credit repair services are merely attempting to capitalize on financially desperate individuals and will do no more to improve your situation than you can do by yourself. The best approach is to save your money, check your credit reports for errors, pay down debt and begin to funnel positive information into your major credit reports in order to devalue past mistakes over time.
Thinking You Must Make Purchases to Benefit: Credit scoring agencies value low credit utilization as well as consumers who do not spend beyond their means. Therefore, as long as you maintain a credit card at zero balance and in good standing, your credit score will benefit.
Using the Wrong Credit Building Credit Card: If improving your credit standing is your goal, you should focus on getting a credit card with the lowest fee structure possible, including no fees for account inactivity. This will prevent credit improvement from becoming a cost-intensive endeavor and will allow you to lock the card in a drawer if you so choose. Neither interest rates nor rewards should be a priority because rewards typically result in higher fees, and you should instead try to pay your balance in full each month.
Keeping a Small Unpaid Balance to Curry Favor with Lenders: For some reason, many people believe that carrying a small amount of debt garners the favor of their creditors because it allows these issuers to earn profits from interest. This is untrue, however, as carrying a monthly balance simply increases your costs.
Paying for Your Credit Score: There is no reason to pay a company for access to your credit report. Not only are more and more financial services companies offering free credit score access, but there is really no reason to worry about your credit score as long as you have your credit report. We are all entitled to a free copy of our major credit reports every 12 months, and this will have all the information you need to determine where your credit stands. After all, credit scores are based on the information in credit reports. Besides, even if you do purchase credit score access, it will only prove worthwhile if you buy the same score used by your lender – which is often impossible to verify.
Foreign Transaction Fees: Credit card companies often charge fees of 2% -4% for each purchase you make in another country. While these fees can lead to high costs, they can be avoided if you open a no foreign transaction fee credit card before traveling.
Balance Transfer Fees: Consumers often become so enamored with 0% balance transfer offers they forget there’s often a fee associated with them. Both interest rates and balance transfer fees impact the financial benefit of a balance transfer, so you must consider them in combination.
Cash Advance Fees: Cash advances are costly, typically triggering a fee in excess of $10 – the average is currently the greater of 3.9% or $12.41. You’ll also get hit with an interest rate of 20% - 36% – the average is currently 22.7% – which begins accruing immediately. That’s why you should never do a cash advance. Instead, get either a debit card or a prepaid card that offers free or low-cost ATM withdrawals, and avoid situations that might require you to spend more than you have.
Rewards Program Fees: Many of the best rewards credit cards charge fees in order to pay for the value they provide to cardholders. Such cards can still wind up easily paying for their fees and much more, depending on your spending habits. Other credit cards have optional rewards programs that require you to pay a fee in order to join. Either way, paying this type of fee isn’t necessarily a good or bad idea; it all depends on what you’re getting for the money.
Overlimit Fees: While over-limit fees were once typically $39 and a thorn in the side of consumers who didn’t keep a close eye on their credit utilization, the Credit Card Act of 2009 has virtually eliminated this type of fee from the market, according to a report by the Office of the Comptroller of the Currency. Cardholders must now actively opt-in for the ability to spend beyond their credit line, and overlimit fees must be proportional to the amount by which the spending limit was exceeded. Still, incurring such fees is a mistake for the average consumer, except for in emergency situations, given the expense involved and the ease with which the situation can be avoided with a bit of planning.
Late Fees: The role of late fees in the credit card market has also changed since the CARD Act. The amount of late fees paid by consumers has dropped by more than half, according to the OCC, and the number of accounts assessed at least one late fee has fallen 30%. The average late fee has also fallen from $35 to $23. That’s all well and good, but it’s still a big mistake to incur late fees. Not only is it an unnecessary expense, considering you can set up auto-payments for at least the minimum required, but it will also lead to credit score damage.
Missing Your Due Date: Missing payments is one of the most problematic and easily correctable issues facing credit card users. It will cost you in terms of late fees, interest payments (given the loss of your grace period), and eventually credit score damage. All you need to do is set up automatic monthly payments from a bank account for at least the minimum amount due. This will take forgetfulness out of the equation.
Doing a Cash Advance: As mentioned previously, cash advances are very expensive thanks to high fees and interest rates that take effect immediately. They also tell your issuer that you are desperate for funds. Basically, they should be avoided at all costs.
Exceeding Your Credit Limit: If you decide to opt-in for the ability to exceed your credit limit, you must only allow your spending to surpass it in the case of a true emergency because it will hurt your credit standing.
Spending Beyond Your Means: If you spend more than you can afford to pay, you’ll end up in debt, paying high interest costs and damaging your credit standing.
Paying Less Than the Minimum: Credit card companies make no distinction between payments below the minimum required and no payment at all, meaning a payment less than the minimum does not stop the advancement of delinquency. Therefore, if you don’t have enough to make a minimum payment, you should wait to make a payment until you do.
Failing to Pay Off Store Card Debt: Store cards often provide great deals and discounts, especially for new accounts, but they typically have high interest rates as well. So, if you carry a balance on this type of card, the savings it provided you will be effectively erased.
Maxing Out Your Credit Lines: Credit scoring agencies use a balance-to-available-credit ratio called credit utilization as part of their credit score calculations. Therefore, spending most or all of your available credit will have a detrimental effect on your credit standing.
Paying Unnecessarily High Interest: Not only should you try to pay off your balance in full each and every month, but there are steps you can take to ensure you’re getting the best possible interest rate. For example, you could apply for a 0% credit card or consolidate your debts.
Assuming Balance Transfers are Just for Credit Card Debt: In theory, you can transfer any type of debt to a balance transfer credit card. That doesn’t mean you should transfer your student loan balance or mortgage, but it could help you save on the remnants of your auto loan or get rid of a payday loan.
Failing to Account for Payment Allocation: If you carry multiple balances on a single credit card (e.g. you made a balance transfer) only the amount of your payment above the required minimum will be applied to the balance with the highest interest rate. So, in order to minimize your interest costs, you should try to pay as much as possible above the minimum each month until the balance with the highest interest rate is paid down.
Ignoring Your Problems: Most credit problems (e.g. debt, delinquency, etc.) get worse when left alone, so it’s in your best interest to directly address any such problems as quickly as possible.
Trying to Remove Negative Information from Credit Reports: Negative information about credit card debt generally remains on your major credit reports for a period of seven years beginning 180 days after the time you entered delinquency. It does not reset for any reason.
Not Knowing Your State’s Statute of Limitations for Debt: The statute of limitations for debt is the time during which debt is relevant under the law. Once it expires, any lawsuit brought to recoup money that you owe will be dismissed, as long as you make it clear to the court that this debt is “time barred.”
Using a Debit Card for Increased Fraud Protection: Some folks mistakenly believe that debit cards protect them from fraud better than credit cards. However, all credit card transactions are covered by $0 fraud liability guarantees, while only signature debit transactions are guaranteed of that. In addition, credit cards make fraud easier to deal with since you don’t have to actually pay out of pocket for purchases until the end of the month. With debit cards, funds are withdrawn from your bank account immediately.
Not Filling Out the Tip Field on Receipts: You can file this one under “leave no room for doubt.” Basically, you want to fill in the tip field on a receipt – even if it entails just writing $0 – because this will make it harder for someone at the restaurant to inflate your total in order to pocket some extra cash.
Not Ordering Free Credit Reports: It is every consumer’s right to receive a copy of each of their major credit reports once every 12 months. Failing to take advantage of this opportunity is a big mistake because obtaining your report gives you a chance to parse your files for errors, signs of fraudulent accounts, and indications of credit score improvement. It’s best to order one of your three major reports every four months in order to keep constant tabs on your finances.
Assuming Credit Reports are Correct: Credit bureaus are mistake-prone. Depending on which piece of research you listen to, anywhere from 5% to 90% of credit reports contain errors. According to the Federal Trade Commission, 1 in 5 people have a mistake on at least one of their three major credit reports. That means you need to take advantage of your right to free annual credit reports and parse your files for errors. You might find a mistake or a fraudulent account that is unfairly costing you money.
Sending Credit Card Info Via Email: You never want to transmit sensitive financial information over unsecured online channels. This includes entering payment information into non-https websites and relaying account details via email or text message. Such practices leave you susceptible to the information being stolen and the resulting inconvenience.
Not Taking Other Commonsense Steps to Safeguard Your Finances: Shredding financial documents, regularly reviewing account statements, locking your mailbox when on vacation, and changing your account passwords are all examples of easy steps that you can take to better protect your financial life.
Assuming Business Isn’t Personal: Many small business owners assume that business-branded credit cards protect them from personal liability for unpaid debts. That is not the case, however, as all of the major card issuers hold small business owners personally liable. That’s why they ask for your Social Security Number when you apply.
Overestimating the Importance of Your Company’s Credit Standing: Since you’re held personally liable for a business credit card, the particular card you qualify for depends more on your personal credit standing than that of your business.
Carrying Debt on a Business Credit Card: Business credit cards are not covered by the CARD Act provision that makes it illegal for credit card companies to apply increased interest rates to existing balances. Therefore holding debt on a business credit card is risky and can result in suddenly increased costs as a result of a credit card company raising its interest rates in order to quickly increase profits.
Not Using a Business Rewards Card: As ill-suited to funding as business credit cards are, they are just as useful for everyday spending. Not only do they provide lucrative rewards in business-specific expense categories, such as office supplies and telecommunications services, but they also offer extremely helpful expense tracking features as well as the ability to set custom spending limits for employees and then earn rewards on their transactions. Using a business rewards credit card is therefore a must for transactions that small business owners can pay for in full within the month.
Failing to Reimburse Your Business for Personal Spending: If you ever use one of your business credit cards for personal reasons, make sure to repay the company for your spending. Otherwise, you’re playing with ethical fire and creating some potential tax problems, since a company bank account is likely paying the bill.
Converting Hard Currency: Converting hard currency at a local bank or an airport Trevelex location is a bad deal. Visa and MasterCard actually offer the best exchange rates, and you can save more than 10% by just buying things with a no foreign transaction fee credit card while abroad. Also taking a debit card that charges low international ATM withdrawal fees will also enable you to access local cash as needed while still saving on currency conversion.
Falling for Merchant Tricks: Foreign merchants often offer to covert purchase totals into U.S. dollars, ostensibly for convenience sake. However, they typically charge inflated conversion rates for the service, so make sure to only sign checks and receipts denominated in the local currency.