You don’t have to be a frequent credit card user to make a costly credit card mistake. Credit cards can offer the ultimate in convenience when you’re traveling, shopping online, or just trying to balance your budget. However, a few slip-ups here and there could set up you up for credit problems in the long term. High fees, a drop in your credit score, and extra charges that you didn’t realize you authorized could have you stuck with a serious credit dilemma in a few short months. Fortunately, many common credit card mistakes are preventable.
Here are six common credit card pitfalls to avoid:
1. Using credit card checks. Those handy checks your credit card companies send in the mail may prompt you to go on a mini-shopping spree, but keep in mind that this is the equivalent of taking out a cash advance–and a costly one at that. Cash advances on credit cards typically involve high interest charges and fees, and you could end up paying a higher interest rate on your entire balance when you cash that check. Make sure you’re aware of the fees involved with signing a credit card check.
2. Playing the rewards game. If one of the primary reasons you got a credit card was to earn rewards or get cash back, make sure to conduct annual reviews of your credit cards to weigh the risks and rewards. Remember that it usually takes a significant number of points and cash spent to earn anything of real value. Read the fine print and calculate how much you will actually need to spend in order to earn that free gift card, airline tickets, concert tickets, and discounts at your favorite merchants. Is it really worth spending hundreds of dollars just to get $10 or $20 back from cash back credit cards? Adding to your debt load just to receive a discount or freebie may not be worth it.
3. Maxing out cards too quickly. Even though your credit card company is highlighting the fact that you have a high available balance, avoid the temptation to use up that balance too quickly. Carrying very high balances on your credit cards can take its toll on your credit score and will mean higher monthly payments until the balance drops. Remember that the ratio of available credit to used credit plays an important role in calculating your credit score. Even though you might be able to afford making minimum payments on your credit cards, it may be harder to drive down that debt load and keep your credit in good shape. Keep your credit card balances to just 30 percent or below your limit whenever you can.
4. “Investing” in a credit card. Some of the most attractive rewards cards that offer luxury perks come with a high price–high annual fees, maintenance fees, and other surcharges. Don’t fall into the trap of thinking you’re getting an amazing deal when you’re actually paying a high price for it. If you’re collecting credit cards as a status symbol, you could be doing some damage to your credit report and also paying a premium price for your privileges. Consider whether you really need these cards and how much value you’ll be getting out of them from year to year.
5. Missing bill payment due dates. It’s all too easy to miss a bill payment or two now and then, but late payments can cost you much more than just fees. If you’ve earned yourself a low interest rate on a card and end up missing more than a couple of payments, your interest rate could double by your next billing cycle. Late fees will be imposed on your credit card statement as a percentage of your total balance, which means you could end up being charged hundreds of dollars just for missing a minimum payment that may have been far less. The missed payment record will also show up on your credit report. Get into the habit of paying your credit card bills on time so you don’t encounter skyrocketing interest rates and excessively high fees. If you have trouble remembering payment due dates, try using free services like Adaptu or Mint to manage all your financial accounts at one place.
6. Thinking balance transfers will solve credit card woes. If you’ve thought about transferring high-interest balances to a low-interest credit card, make sure you’re aware of the fees and charges associated with coordinating the transaction. Many people overlook the price they’ll end up paying to authorize the balance transfer. They don’t realize until it’s too late that they would have ended up paying less in interest if they had left things as-is. Crunch the numbers so you know exactly how much a transfer will cost you–and if it’s really worth it.