There are many benefits to having a credit card, from not having to carry cash with you for large purchases, to extended warranties and credit card rewards.
But if you are not smart with your credit card, it can turn your financial life upside down.
And the scary thing is this can happen a lot faster than you think.
In this post, I highlight 15 major credit card mistakes you need to avoid at all costs.
Not only can making these common mistakes put you into a mountain of high interest debt, it can ruin your credit, and add stress to every aspect of your life.
Read on to make sure you are not making any of these bone headed mistakes.
15 Common Credit Card Mistakes You Need To Avoid
#1. Making Late Payments
Arguably one of the biggest mistakes you can make with your credit card is to make a late payment.
There are a few reasons for this.
First, you will get charged a late fee, which is typically around $40.
While this doesn’t sound bad, it gets worse.
If you are on a promotional APR or introductory offer, this rate goes away and a penalty APR is enforced, which tends to be 20% or higher.
Even if you are not on a promotional APR, you still go on the penalty APR, which is higher than the standard purchase interest rate.
So not paying your bill on time results in fees and higher interest charges.
The bottom line is, you need to make sure you know when the due date is and make payment before this date.
You can make a note to remind yourself or even set up automatic payments with your credit card issuer.
Either way, you need to ensure you pay your bill on time every month.
#2. Not Making Your Monthly Payment At All
As bad as it is to pay late, if you stop making your credit card payment, even worse things happen.
If you are 30 days late or more, it gets reported to the credit bureaus, and as a result, your credit score drops.
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This results in higher interest rates on future loans you take out or you might not even be approved in the first place.
And since insurance companies and employers look at your credit report, you might pay higher insurance premiums and get passed over for a job as a result.
#3. Never Reporting A Lost Or Stolen Credit Card
If you ever lose your credit card or it gets stolen, you have to report it immediately to the credit card company.
This is because there is a good chance that someone is using it to make fraudulent purchases.
And while most credit cards will not make you liable for unauthorized purchases, there is still the headache and worry over if your identity was stolen
So if you lose your credit card, report it immediately.
Your credit card company will issue a new card with a new number and deactivate your old card.
If you notice charges on your statement before you realize your card is missing, you need to call the card company to dispute the charges.
Luckily, thanks to the Fair Credit Billing Act, you are only responsible for $50 worth of the charges, however, most card companies offer zero liability.
#4. Maxing Out Your Credit Card
Another credit card mistake people make is maxing out their credit card.
While it is nice to have a high credit limit on a card, it’s not a good idea to be hitting it, ever.
This could be a sign that your spending is out of control.
Or worse, you are getting yourself into high interest debt that will be hard to dig out from.
Instead, learn to how to use your credit smartly so that you can enjoy the benefits it has to offer.
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You should never have a high balance on your credit card.
Ideally, you want to keep your balance to be no more than 30% of your available credit.
This 30% is known as your credit utilization ratio and you get to it by dividing your total outstanding credit card balances by your total available credit.
So if you have 2 credits cards, both with $500 balances and each has $2,000 available credit, you divide $1,000 by $4,000 to get a ratio of 25%.
#5. Spending More Than Your Credit Limit
If you ever try to spend more than your credit limit, a few things could happen.
First, in order for any of the below consequences to happen, you need to have signed up for over the limit protection, which allows you to overspend in the first place.
If you didn’t sign up for this, and since most credit cards no longer offer it, you probably didn’t, then your charge will just be declined.
But if you did sign up for over the limit protection, here are the things that could happen.
- Over The Limit Fee: This will happen as most all credit cards will charge you a fee.
- Higher Interest Rate: This too will happen and your APR will just to a higher penalty APR.
- Lower Credit Limit: This could happen, as your credit card company could lower your limit as a result, thinking you are getting into financial trouble.
- Lower Credit Score: Since your debt to credit ratio will worsen, your credit score will most definitely be impacted.
- Closed Account: If you go over the limit too often, the credit card company could close your account.
As you can see, there are serious impacts to your credit if you spend over your limit.
The biggest that most people will face is fees and higher interest rates, which is not ideal.
#6. Not Understanding The Difference Between Purchases, Cash Advances, And Balance Transfers
Credit cards offer three ways to use your card, purchases, cash advances, and balance transfers.
Here is an explanation of each.
- Purchases: Using your credit card to make everyday purchases
- Cash Advance: Using your card to get access to cash
- Balance Transfer: Moving a balance from one credit card to another card.
Understand that each of these ways to use your credit card carries a different interest rate.
For example, with purchases, you pay the standard purchase APR and have a grace period until your payment is due.
With a cash advance, you have a much higher interest rate and you need to pay back the money borrowed when the statement is due.
There is no paying a minimum and carrying a balance.
Finally, with a balance transfer, you typically get a lower APR for a set amount of time and are charged a fee
If used right, you can save money with balance transfers to help you get out of debt.
At the end of the day, it is important you understand how each of these work so that you don’t get hit with any surprises and possibly end up in more debt or ruin your credit.
#7. Only Making The Minimum Payment
Once of the worst things you can do with credit cards is only paying the minimum amount due.
While it sounds nice to only pay a small portion of your balance, it can quickly get out of control.
For example, let’s say you have a $5,000 credit card balance and pay 17% interest.
Each month you pay the minimum, which in this case is $100.
It will take you over 30 years to pay off this credit card and you will pay over $10,000 in interest.
If your balance is a $5,000 bedroom set, it ends up costing you over $15,000 when you take into account interest.
It’s important to pay your credit card bill in full every month to avoid this scenario.
If you can’t pay your bill off each month, you need to stop using your credit card until you can use it smarter.
#8. Signing Up An Authorized User
An authorized user is a person you allow on your credit account.
They get their own credit card to make charges, but are not liable to pay the bill.
While having an authorized user is a smart thing to help your child build credit or for your spouse to use the same credit account as you, you shouldn’t just allow anyone on your account.
This is because of the reason I mentioned.
They are not responsible for any payments.
So if you don’t use your credit card to make any purchases, but an authorized user made $3,000 in purchases, you have to pay the balance.
If you don’t, then you get hit with the late fees and it is your credit history that is destroyed.
The bottom line is, think long and hard before you allow anyone on one of your credit cards as an authorized user.
#9. Randomly Closing Accounts
Over the years, we might amass a lot of credit card accounts.
We open a store credit card to save 15% off a large purchase or we opened a new account to take advantage of a balance transfer offer.
Then we never use the credit cards again.
In these cases, you are OK to close the account once you pay off the bill.
Your credit might take a small, short-term hit, but it will recover quickly.
What you don’t want to do is close all your accounts or even accounts you’ve had a long time.
This is because a large part of your credit score is based on the time you’ve have an account.
The older your account, the more it shows how responsible you are with credit.
So that first credit card you ever got?
Do not close it, just stop using it if it doesn’t have the best terms.
Then once a year, use it to buy something small.
If you go to out to dinner, use the card once and pay off the balance.
Then use it again for something small next year.
This will stop the credit card company from closing the account on you, preserving your credit history.
#10. Not Understanding How Deferred Interest Works
Not many consumers understand how deferred interest on credit cards work.
As a result, they open up their credit card statement one day and are hit with a nasty surprise.
The good news is that most credit cards don’t have this feature.
You will encounter deferred interest with retail credit cards, like when you sign up for a card in the store.
The deferred interest promotion works like this.
You agree to sign up for the credit card and you pay no interest for one year.
The catch here is that even though you are not paying interest, interest is accumulating.
And at the end of the introductory period, one year in this case, if you haven’t paid off the entire balance, you will be charged interest from day one.
So if you charged $5,000 on a credit card and at the end of the promotion you have a balance of $500, you don’t owe interest on the $500.
You owe interest on the entire $5,000 for the whole year.
Because of this, if you do sign up for this offer, you need to be very careful.
I’m not telling you to avoid this offer, because many times you also get a nice discount on your purchase, say 15% or 20% off.
You just need to make sure you pay off the balance before the promotion ends.
When I worked at a retail store, I explained this to consumers and walked them through the process.
If they spent $5,000 and the promotion lasts one year, I divided $5,000 by 11 months and told them they need to pay a minimum of $454 a month.
Why 11 months and not 12 months?
I didn’t want to take the chance of something happening.
It’s better to pay it off before the offer ends than the day of it ending.
Also understand if you are late with a payment, the deferred interest option goes away, regardless if you are still in the promotional period.
#11. Not Using A Credit Card That Offers Rewards
Many credit card today offer cash back or travel rewards to users.
This usually happens as a 1% cash back reward or a point per dollar spent reward.
So if you spend $10, you get $0.10 in cash back, or 10 points if you have a travel credit card.
While these rewards sound small, over time, they add up.
We strategically use our credit cards and average $1,500 in cash back each year.
This is free money since we pay our balance in full every month.
We use invest this money or use it to help fund our kids 529 plan.
Some people use travel points to travel for free or close to free.
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At the end of the day, if you are going to pay with credit cards, you need to take the time to find the right rewards credit cards so you can enjoy the benefits they offer.
#12. Letting Your Rewards Expire
If you already use a rewards credit card, it is important to understand when and if your rewards expire.
Not all credit cards have rewards expire and the ones that do, usually do so after a few years.
By letting your rewards expire, you lose out on great discounts you otherwise could get.
So if you do have rewards, make sure you understand the process of if and when they expire and how you can avoid getting to that point.
#13. Paying For An Annual Fee Card
There are a handful of credit cards that charge an annual fee to use.
If you are using a credit card with an annual fee, you need to ask yourself if you are getting enough value out of it to offset the fee.
In many cases, you can find as similar of a card or better card without an annual fee and save the money.
This can end up being a large amount of money too.
If you pay the average annual fee of $95, over 10 years you paid $9,500 in fees.
Did you earn enough rewards to make up for this amount?
Chances are you didn’t.
Now, there might be a good reason to pay an annual fee.
We have one credit card that has an annual fee.
The only reason we pay it is because we earn 6% cash back on groceries and 3% cash back on gas.
The amount we earn in cash back far outweighs the annual fee.
The bottom line is, review any cards you have with an annual fee and decide if the fee is worth it or if there is a better card without a fee out there.
#14. Buying On Emotion
Buying on emotion can get you into credit card debt fast.
If you are going through a tough time personally, you need to hide your credit cards.
Too many times you get sucked into making purchases you will later regret and the result is years of financial headaches and years until you catch up financially, if you can catch up at all.
Get help if you need it, otherwise, opt for paying with cash until you get back to a better state of mind.
#15. Opening Too Many Credit Card Accounts
As bad as it is to close old credit accounts, it is almost as bad to open a lot of accounts.
The more accounts you have open, the greater the risk of overspending.
And credit card and loan companies know this.
If you don’t have long and solid credit history, having 10 credit card accounts open with a total credit limit of $40,000 can be a red flag.
And if you open too many accounts in a short period of time, this too will make creditors nervous.
So be strategic when you open up new credit card accounts and don’t over do it.
There are the worst credit card mistakes you can make.
As you can see, making these mistakes can result in fees, higher interest rates, damaged credit and more.
Because of this, you need to make sure you limit the chances of making any of these blunders so you can keep your credit and your finances in good shape.