Many of us have a credit card and when used responsibly, they can be a great financial tool. Credit cards offer convenience, rewards, and help boost your credit score.
However, when a credit card is used incorrectly the damage can be far-reaching. You could suffer financial loss, a drop in your credit score, and refusal of credit elsewhere.
To help you stay on top of your credit card, this guide will highlight 4 credit card mistakes to avoid. By avoiding these mistakes, you can enjoy a greater credit score, bigger spending power, and more financial freedom in the future.
Credit Card Mistakes
Credit cards can be a fantastic financial tool when used correctly, but if things go wrong you could end up paying penalties, higher interest rates, and your credit score could drop dramatically!
To make sure you don’t suffer financial loss here are four credit card mistakes to avoid.
Making only minimum payments
Most credit cards send you a bill every month with an option of paying a minimum amount. If you only pay the minimum every month, then you will pay more because of the interest that accumulates with each bill.
Credit card companies offer a minimum payment option partly to offer flexible payment options for customers, but also because they make money from this. The longer customers take to pay a credit card balance, the more the credit card company earns in fees and interest.
To help you visualize how much you could save, here is an example:
- Let’s say your credit card has an interest rate of 21% and a balance of $4,000. Every month you pay the minimum payment. For this example, the minimum payment will be 1% of the balance plus interest every month. Paying this way will take 21 years to pay the debt off in full. Interest charges over that period will amount to $6,374.64. In total, you will pay more than $10,000 back to the credit card company!
The increase in debt will eventually damage your credit rating. This is because your debt-to-credit ratio will tip too far towards debt. Lenders don’t like people that have a large portion of their income servicing debt repayments.
Paying the minimum may be helpful sometimes such as if you lose your source of income or you have taken advantage of a 0% APR offer. However, you should always pay more than the minimum when you are able to. Preferably, the full balance should be paid off every month. I will explain why it’s good to pay the full balance every month later in this article.
Paying late or missing a payment completely can damage your credit score. Another consequence of missing payments is incurring additional fees and interest.
To avoid this costly credit card mistake you must remember to pay on time every month. A good way to do this is to set up autopay for at least the minimum amount. You should pay the full balance if you are able, but if the minimum is covered, then you at least avoid fees for paying late.
Make sure to set up notifications from your credit card provider. They may offer email, text, or even a call to remind you when a payment is due. Check the available options and set up a system that works for you. Even if you mark the due date every month on a calendar, that’s better than nothing!
If you are in a situation that means you can’t pay due to a job loss or other life event, don’t ignore your credit card bill. Fees and interest for missing payments will accrue fast. Contact the credit card provider and ask for help. They may have more options than you realize. Doing nothing means you could be in for a big bill and potentially legal action which means more costs.
Taking out a cash advance
A key benefit of using a credit card is that it offers more security than using cash. Many transactions are protected when you use a card. However, there are times when only cash is acceptable so drawing it out at the nearest ATM using your credit card may seem like the easy answer.
Withdrawing cash using a credit card is a mistake you should avoid. There are two big reasons for this.
First, a transaction fee. Most credit card issuers charge an additional fee for certain types of transactions. Withdrawing money from an ATM is one that nearly all will charge an extra fee for.
Another reason to avoid taking out cash is because of a higher interest rate. Credit card companies often apply different interest rates to different transactions. Taking out cash usually has a higher rate than using the card to make a purchase.
If you must use cash, then make a withdrawal using your debit card. Using your debit card means you can avoid extra fees and higher interest rates.
Carrying a balance month to month
Credit cards can be great when used properly. They allow you to make secure transactions with less hassle. Provided you stay within your credit limit, then you can always spend up to the limit available.
As mentioned earlier only paying the minimum every month means it will take a long time to pay off the debt. What about carrying over a balance month-to-month?
This is also a credit card mistake that you should avoid. Every month when your credit card bill is calculated, interest will be added to any balance that has been carried over. Over time this means you could end up paying back more in interest charges than you borrowed in the first place!
It’s always best to pay the balance in full every month. Don’t carry anything over as this will mean paying more back.
If you need to make a large purchase that you know you can’t pay off in full, then there are a couple of options to consider. Try to save up the money if it’s something you can wait for. For purchases that can’t wait, ask the company if they offer credit. Some companies may offer interest-free credit options and you could explore these payment options before using a credit card.
When used wisely credit cards offer excellent features such as security, worldwide acceptance, and rewards. However, improper use of a credit card can turn into a financial burden that could mean financial loss, a lower credit score, and reduced credit availability.
Avoid these four credit card mistakes to continue getting the most out of your credit card facility.
About the Author
Chris Panteli is the creator of LifeUpswing.com. He has a degree in Business Economics from the University of Liverpool and owns a small fast food business. He will help you make money, save money, and think about money in a way that will give you back your freedom.