11 Common Credit Card Mistakes You Might Be Making
You don’t have to be an expert to know that paying bills late (or not at all) isn’t good for your credit score or overall financial health. But there are plenty of other credit card no-no’s that might not be as obvious to you. Read on for 11 credit card mistakes you might be making—and don’t worry: They’re common oversights with easy fixes!
The age of your credit history is an important factor in your credit worthiness. The longer your credit history, the more reputable you become as a borrower. So start building your credit file as soon as you can. If you don’t have a credit card, get one. If you have poor credit already, get yourself a secured card, which you can acquire by depositing the total amount of credit you desire up front.
Carrying a balance on your credit card can hurt your credit score if the balance gets too high. Your credit score is influenced by how much available credit you have and the balances you owe, on both revolving and instalment accounts. Revolving accounts (like a credit card) are beneficial to have on credit reports, because, over time, they show a history of how well you manage credit. If the amount you owe on your revolving account is more than 30 per cent of your credit, it may have a negative impact. Carrying high revolving balances increases the chance that you could have trouble paying back any additional credit. It’s usually beneficial to keep your credit card balances as low as possible, between 10 and 25 per cent.
While it’s beneficial to keep your balances low, having a bunch of inactive cards in your wallet isn’t ideal either. High un-used revolving credit limits can also hurt your score because you can get into a lot of debt really quickly with the credit you already have.
While having a high amount of unused credit available to you through a lot of cards can definitely work against you, closing a credit card once you pay it off isn’t always the best answer either. By immediately closing a card after you’ve paid it off, you’re effectively worsening your utilization ratio, because (assuming you have other credit cards) you’re now using a higher percentage of the total credit you have available. After you’ve paid off a high balance, if you can avoid temptation and use it wisely, it might be better to keep that card open so you can improve your credit utilization ratio.
Your credit score is also partly determined by how long you’ve been borrowing (see slide 1), so closing a card with a long history of positive behaviours (like paying bills on time) can remove the benefit of your long credit history.
Paying your bills on time and paying the monthly minimum payment isn’t going to hurt your credit score directly, but it certainly won’t help you pay down your balances. You’d be surprised by how much faster paying an additional $10 a month or so can help you get out of debt. Paying more than the minimum means you’ll owe less in total interest charges in the future.
For example, let’s pretend we’re paying off a credit card with a balance of $1,500 and an APR of 18 per cent. With a minimum monthly payment of $37 a month, it will take 159 months to pay off the debt, with a total interest charge of $1,760. By paying just $10 extra per more (so $47 total), it will only take 44 months (almost 10 years sooner!), with a total interest charge of $557.59—a savings of $1203! If you have an extra $10 or more laying around each month, you’d be foolish not to put that toward your credit card debt.
Low- or no-interest introductory annual percentage rates (APR) are common and valid incentives to apply for credit cards. These last at least six months, and often a year or more, with APRs increasing after the introductory period is over. By all means, it’s smart to take advantage of them if a higher APR card is costing you, but these teaser rates are often misunderstood—or forgotten about. If you don’t pay off your debt before the introductory period expires, interest charges will be charged retroactively—and usually at a higher rate.
We’d recommend setting an event on your calendar about a month before your introductory rate will expire, so you’re not surprised. And don’t transfer a balance to a low-interest introductory APR card, or make a big purchase like an appliance or furniture on one, if you don’t think you’ll be able to pay off the balance within the teaser period.
Travel points, cash-back, and other rewards are always tempting, and can be valuable. But it’s important to read the fine print. If you’re carrying a balance and have a high-interest rate card, those perks may not be worth it after all. When you’re considering applying for a new card, do your research and make sure you’re not choosing a card for the wrong reasons.
Not only is it embarrassing to have your credit card rejected at the cash register, but if you’re not in an over-limit program, your credit card company can charge you a hefty fee for exceeding your credit limit. Keep an eye on your transactions and read your statements regularly, so you don’t make this mistake.
Not doing research before you choose and apply for a credit card can be an extremely costly mistake. You should always look for the best possible APR. Be mindful that unsolicited offers you receive in the mail generally don’t have the most favourable rates. So comparison shop on sites like BankRate.com to find the best deal.
If you prefer the convenience of plastic, use debit cards for everyday purchases like meals, groceries, and gas (just don’t spend more than what’s in your bank account). Avoid using credit cards for these small expenses or you’ll wind up paying off those debts long after you purchased them (and paying more for them with interest rates). Reserve credit cards for big-ticket purchases like furniture and airfare that are easier to remember. If you find yourself reaching for your credit cards between paychecks, you’re probably living outside of your means and it’s time you cut unnecessary expenses.
Whatever you do, don’t ask for a cash advance from your bank unless it’s a real emergency. Cash advances from credit card companies generally incur interest rates several points higher than your normal rates, and, on top of that, there may be a transaction fee of 2 to 4 per cent, a flat fee, or both. If you’re really in a pinch, ask for one from your employer or from a family member instead; you very likely won’t incur any fees.
What else would you add to this list? Tell us in the comments below.
Opening photo: Le 21ème