There are many benefits to having credit cards. They can help you build and maintain a credit score; they help pay for expenses, they offer a certain level of security and some even offer rewards or discounts to help you save money. However, there are several pitfalls to avoid when it comes to managing credit cards.
Carrying a Balance Month-to-Month
There is a common misconception that carrying a balance month-to-month on your credit card can improve your credit score. In fact, it can hurt your credit score and cost you a lot of money in interest.
Making Minimum Payments
It is wise to make at least the minimum payment on your credit card balance, but it is best to pay more than the minimum due. If you can, it’s best to pay the bill in full every billing period. If you don’t, it could lead to falling into debt and having to pay more in interest fees.
Missing a Payment
Missing a payment can cause you to have to pay late fees. It can also damage your credit score. If you are more than 30 days past due on your payment, your credit score may experience a drop between 17-83 points, and 27-133 for a 90-day missed payment (FICO). If your payment is less than 30 days late, you likely won’t see a drop in your score because late payments are only reported to the credit bureaus (Experian, Equifax and TransUnion) if payments are more than 30 days late. To avoid late payments, you can set up autopay, or email or calendar reminders.
Not reviewing your billing statement
Reviewing your statement regularly is important so that you can catch any inaccurate transactions. If you see an unfamiliar or suspicious charge, you can report it to your credit card company right away so they can take action to correct the issue.
Not being aware of your APR and fees
As part of the agreement you sign when applying for a credit card, there is information about the APR and fees. Although it may be tempting to avoid the fine print, it is crucial to review the account terms so you know what fees there will be.
Some fees to be aware of are below:
- Annual fee: A yearly fee for holding the card.
- APR: APR stands for annual percentage rate. It is the yearly interest rate you are charged when you carry a balance month-to-month.
- Late fee: This is the fee you will pay if you make a late payment. This fee could go up depending on how many payments you miss.
- Foreign transaction fee: When you make a purchase in a different country, you will often get charged a foreign transaction fee. Even if you buy from an online store based in another country, you could still experience the fee even if you haven’t physically left the country.
Not understanding offers
Many credit cards start off with a promotion offering a perk, like 0% APR where you avoid being charged interest on certain transactions. Make sure to review the fine print to see how long the promotion lasts, and what the rate, etc. will be afterward.
If you take out a cash advance, most credit cards start accruing interest on that type of transaction immediately. There is no grace period like with regular purchases. There is also usually a fee associated with this type of transaction.
Maxing out your credit card
Typically, it is best to avoid maxing out your credit card. Maxing out your card can cause your utilization rate, the amount of debt you have compared to your available credit, to be high. A high utilization rate can lower your credit score. If you regularly get close to your credit limit each month, and you’re able to pay it all off each billing cycle, it might be a good idea to ask your credit card company if they can increase your credit, which will lower your utilization rate.
Applying for new credit cards too often
Every time you apply for a new credit card, it will appear on your credit report. The more inquires you have in a short period of time, the more you appear as a risk to lenders. It is best to only apply for a credit card when you need one. A good rule of thumb is to wait at least 6 months before applying for an additional card. Before applying you can check your eligibility through pre-qualification forms which will tell you if you qualify without damaging your credit.
Closing a credit card
One element that is calculated in your credit score is the average length of time you have had credit. When you close a card, it will affect the average score.
Overall, a credit card can be a great tool that has many benefits. As long as you know how to avoid fees, and how to protect and grow your credit score, it can be a great way to manage your payments.