Even if you think you're doing everything right, when it comes to using your credit card you may be making some common credit card mistakes that could potentially be costing you thousands of dollars. Credit cards are a convenient alternative to cash and they can help you build a credit history — but many Americans are making costly mistakes with their cards.
Only 35% of credit card users in the U.S. pay their bill in full each month, and the average consumer is $4,717 in debt. If you aren't careful, you could end up paying thousands more in interest on top of that debt.
So, how does this happen?
Credit card companies and stores have techniques for making you spend more than you can really afford. After all, if you spend beyond your means the credit card company gets to collect interest while you're digging yourself out of debt.
But if you know the common credit card mistakes to avoid, you can get around any tricky pitfalls of credit card ownership, and begin building a solid financial foundation for your future that requires exceptional credit to get ahead. Learn from the Card Guru team's mistakes before they become yours. Here are our top 7 mistakes to avoid when it comes to what plastic's burning a hole in your wallet:
1. You don't pay your bills on time
The fee for a late payment is often more than the minimum payment would've been—but that's not the only way a past-due payment can affect your finances. They can also have a negative impact on your credit score. According to myFICO, your payment history makes up 35% of your credit score, which means whether or not you pay your bills on time affects your score more than any other spending habit.
Missing a payment can have a serious and long-lasting impact on your credit, making it harder to get a loan in the future. If you're more than 60 days late, many credit card companies will increase your interest rate to a higher "penalty rate"—which can sometimes skyrocket as high as 30% APR. When that happens, it'll take you much longer to get out of debt, and you'll rack up significantly more interest in the process. Even after you get your payments back on track, the higher interest rate will likely stick around as a little reminder of your mistake until you go six months without a late payment.
Say you have a credit card with a $1,500 balance. If you go 60 days past due, you'll most likely be charged two late fees (probably around $35 each) which is bad enough, but if you're hit with a penalty rate, you lose even more. If your APR is increased from 18% to 29%, the interest you pay in a year will increase from $270 to $435—a $165 increase!
No one wants to lose hundreds of dollars or wreck their credit because they missed a $25 minimum payment.
If you have trouble remembering when payments are due, set up automatic payments to avoid incurring late fees. And if you're struggling to make the minimum payments on time it may be time to revisit your budget and see where you can cut back on spending.
2. You only make the minimum payment each month
Low minimum monthly payments are part of the appeal of credit cards. If something's out of your budget, you can always put it on plastic and pay it off a little bit at a time. But when you do, you'll end up paying way more than you originally planned for the item.
Let's say you buy a new phone for $750, and you pay for it with a credit card that has an 18% interest rate and a minimum payment of $25 per month. If you only make that minimum payment every month, and you don't spend another dime on that credit card in the meantime, it'll take you more than three years to pay off your balance, and you'll end up paying an extra $253 in interest charges, making the true cost of the phone more than $1,000.
Not only can you end up paying more on your purchases, but you can also damage your credit score even if you're paying right on time! That's because when you only make the minimum payment, you pay off your credit card debt at a much slower pace, and part of your score depends on how much credit you're using.
"Consumers with a lot of debt generally have lower scores than those who do not," says Dan Rafter at WisePiggy. "A best practice is to always keep balances — your credit ‘utilization' — under 25-30% of available credit."
Luckily, there's an easy (and relatively painless) fix for this:
Instead of paying the minimum each month, if you paid $50 each month toward your $750 balance, you would be able to pay off the phone in 18 months with $106 in interest charges. It's not perfect, but it's much better than only paying the minimum. Trust me, when I was climbing out of debt years ago, my wife and I pushed each other to add every extra dollar we could to our monthly payments. For a few months, it meant no dinner out at the local diner, but it was so worth it in the long run.
3. You aren't staying on top of your credit
Managing credit card debt can be stressful, and you may be tempted to just stuff the monthly statement in a drawer and send in the minimum payment. (Or worse yet, ignore the paperless statement in your overflowing email box.) But it's important to stay on top of your credit. It may feel overwhelming sometimes, but understanding your financial situation is the first step in taking control of your money.
Here are a few things you need to keep track of:
Your monthly statements.
Yes, going over your statement with a fine-tooth comb can be an unpleasant reminder of how much money you spent or where you blew your budget, but it's important to double-check your transactions each month. Andi Willis, the blogger behind Good Life Organizing, says she makes a habit of checking every transaction on her credit card statement—and it paid off one month when she spotted an erroneous $318 charge from a clothing store and $35 worth of charges from a dating site for farmers (seriously!)
If you don't already do this, you can make it a habit to read the statement immediately before you send the payment, so it becomes part of the routine of paying your bills. Or, pick one day each month to glance over any statement you've received that month.
Your credit report.
If you don't check your credit report regularly, you won't be able to catch any errors. And while that may seem like a long shot, it's really not. A report from the FTC found that one in four consumers have found mistakes on their credit report. You're entitled to a free credit report (no strings attached!) from each of the three major credit bureaus every year through the FTC-recommended AnnualCreditReport.com.
Keep close tabs by checking one bureau every four months.
Add it to your calendar now so it doesn't get lost in the shuffle. For example, you could schedule it for February 1, June 1, and October 1—and if you're using an online calendar like Google, you can even set it to recur every year.
If you pay your balance in full every month, you may assume the APR—the annual percentage rate that tells you how much interest you'll be charged in a year—doesn't really matter for you. If you're not racking up interest anyway, who cares what the rate is? But if you suddenly find yourself in a financial bind, that 29% APR you've been blissfully ignoring can cause serious strain. At that percentage rate, if you leave a $2,000 balance on your credit for just one month, you'll accrue $48 in interest, and by the end of the year, you'll owe an extra $580 in interest on that balance.
If your APR seems high (for reference, the average APR is just under 16%), call the credit card company and ask if you can have it lowered. You'd be surprised how effective this is! It's as simple as getting a representative on the phone and trying this script for negotiating a lower rate:
Hi, my name is _____. I've been a good customer of [current credit card company] for [number of years], and I make my payments on time, but my APR is too high. I have offers of [x] from [competing credit card company A], and [y] from [competing credit card company B]. I've had a good experience with you, but I'm considering switching. I would like to have my APR lowered.
Your terms and conditions.
Credit card terms are usually long, boring, and jam-packed with jargon, so it's no wonder people skim to the bottom and check "I agree" without really reading the terms. Make sure you fully understand what you're signing up for on those terms and conditions, as well as the benefits. Read the guide and all of the fine print. Things to look out for include the APR, annual fee (if applicable), and any finance charges, late fees or overdraft fees that may get tacked on.
4. Your rewards program is costing you
Rewards are a great way to get discounts, gift cards, or cash back on purchases you needed to make anyway, but there are a few common mistakes that can chip away at your rewards and even end up costing you more, so make sure you're not doing any of the following:
Paying a steep annual fee for your rewards.
Some rewards cards include an annual fee of $99 (or more) just for enrollment in the rewards program. If you're earning 2% rewards, you'd need to spend $5,000 before you even break even on that. If you're paying an annual fee on a rewards card but not using it to its full potential, it's time to look for a new card.
Being too loyal to one brand.
Retail rewards cards can offer enticing discounts at your favorite store, but when you get rewarded for spending money at a certain store, you may purchase there without shopping around for the best prices—and that can work against you. If your store credit card gives you 5% back on purchases, but another store has the same product on sale for 10% off, you're missing out on savings if you don't shop around.
Best case scenario? Find a lower price elsewhere, then ask your favorite store to match the price so you get the cheaper price and the rewards.
Choosing the wrong rewards card.
If you sign up for a credit card that earns air miles, for example, but you don't travel often and your monthly spending is pretty low, it's going to take a long time to earn enough miles for a free flight. You're better off finding a card that rewards the type of spending you already do. If you stop at a certain gas station every week, for example, a credit card linked to that gas station—or a cashback card that gives bonus points for gas purchases—will rack up rewards much faster than, say, a card linked to a hotel chain you only stay at once a year.
It's important to analyze your wallet and spending behavior on a regular basis to make sure you have the right mix of cards. One easy way to maximize your rewards: Download an app like Wallaby, which helps you choose the best card in your wallet based on where you're shopping that day.
- 3% cash back on all purchases made in your first year, up to $20,000 spent. After, earn unlimited, automatic 1.5% cash back on all purchases
- No minimum needed to redeem cashback rewards.
- 0% Intro APR for 15 months for purchases and balance transfers.
- No annual fee.
- Ultimate Rewards points make it easy to transfer points across Chase cards
Getting tricked into spending more.
Say your cashback rewards card offers a promotion in which you earn bonus points for dining out. Your first instinct is probably to head to your favorite restaurant and take advantage of the deal, but if that dinner wasn't in your budget to begin with, it's not worth the extra rewards. You should never spend more than you can afford for the sake of earning rewards.
Most rewards are between 1-5% of the purchase price, but your APR could be 15% or more. So, unless you can pay off your balance at the end of the month, your interest rates will probably cancel out any rewards you earned (and then some). Rewards can be a nice perk, but remember that companies offer rewards as a way of encouraging you to spend more with them, and if you're not careful, those rewards can actually cost you.
According to the Bond Loyalty Report, 66% of Americans said they change the way they spend money to maximize their rewards. According to the reward provider Swift Exchange, around $16 billion worth of rewards go unused in the U.S. every year, meaning many people are spending more to earn more rewards, and not even using the rewards! Personally, to make sure I don't get carried away with enticing rewards, at the start of each month I budget what I know is a healthy and typical amount for dining, entertainment, etc. That way, when an enticing reward comes my way, I can simply check the budget to know if the reward is actually saving me dollars or enticing me to spend more than I typically would.
Having one card for everyday expenses that gives the most rewards is the way to go too. Stick to using that one card, and have all your rewards in one place. This keeps me from having multiple cards with payments, balances, and rewards I cannot yet use because I have not gotten enough points racked up!
Get the most out of your rewards card by choosing a card that rewards the type of shopping you already do—and don't use it as an excuse to buy more, or let it deter you from bargain hunting.
5. You're taking cash advances on your credit card
Most likely, your credit card company occasionally sends you a few blank checks in case you want to withdraw some cash against your credit limit. ou may also have the option of using your credit card to withdraw money at an ATM. That may seem like a nice perk, but there's a reason your credit card company offers you this convenient way to get cash: You'll typically be charged a hefty cash advance fee plus a steep interest rate on the amount you take out.
Interest rates tend to be 6-10% higher on cash advances than on purchases, and usually begin accruing immediately, rather than at the end of your payment cycle.
6. You stick your credit cards in the freezer
You may have heard this popular hack for spending less: Just freeze your credit cards in a block of ice. It'll be there if you need it in an emergency, but you won't be able to use it in the meantime. In theory, that sounds like an easy way to rein in your spending habits, but if you go too long without using your credit card, your account could end up getting closed for inactivity, and this can have a negative effect on your credit score by hurting your debt utilization ratio, which is the amount you spend compared to the amount of credit available to you.
Utilization accounts for 30% of your credit score, and the goal is to keep it low. So if you're being responsible and not spending more than you can afford, why would a credit card company close your account? And wouldn't zero utilization be a good thing?
John Ulzheimer at MintLife explains it this way:
Credit card companies make money when you swipe your card or carry a balance. If you're not doing either of those things, they can't make any money off of you, but it still costs them money to maintain your account. So eventually, they might just drop your account altogether—and that's what can ultimately affect your utilization and hurt your credit score.
Ulzheimer adds; "Here's where the indirect impact to your credit is going to occur. When a credit card issuer closes your account (for whatever reason) you immediately lose the value of the unused credit limit on that card. This means your infamous revolving utilization percentage could go up, and it could go up a lot."
Say you have two credit cards: one with a $2,500 limit and one with a $10,000 limit. You freeze the card with the high limit to avoid temptation, and you only use the card with the $2,500 limit, which currently has a balance of $1,500. That means you're using 12% of your available credit. But if the credit card company with the $10,000 limit decides to close your account for inactivity, your utilization suddenly soars to 60% of your available credit!
So instead of literally freezing your cards, set a strict budget for yourself and find one or two small charges—like your water bill or your gym membership—that you can put on your credit card each month and immediately pay off.
This will help you demonstrate responsible spending without racking up debt in the process. By improving their utilization ratio, some consumers can see their credit scores improve by 10 to 50 points or more.
7. You don't have a credit card
It may seem like the easiest way to avoid these credit card mistakes is to simply refrain from having a credit card at all. But this strategy isn't as foolproof as it sounds because your credit score is based on how you handle credit—and if you don't have any, you don't have a credit history, which can make it hard to get a loan when you need one.
As long as you use your credit card responsibly, it can be a valuable tool for building better credit.
Boost your credit history by avoiding credit card mistakes
Your credit card can be a valuable tool for building a credit history (and having a safety net in case of an emergency). But if you're not careful, common credit card mistakes can lead to higher debt, a lower credit score, and a tougher time getting a loan down the road. The good news is, avoiding the same rut I fell into when I was younger is easily avoidable, as long as you know what to watch out for. Before signing up for a credit card just because the cashier is offering you 20% off your purchase, ask what the APR is, and think about whether or not you really need to get $20 off right at that moment. Chances are the APR will more than pay the store back for the $20 discount, and you will pay more than the $100 you spent at the register.