Credit cards are sometimes seen as a negative when it comes to personal finances; however, the problem isn’t with the credit cards themselves. Rather, problems can arise when we use credit cards in the wrong ways, which can lead to expensive late fees, increased interest rates and more. In fact, there are some common credit card pitfalls easy to fall for if you’re not careful. We’ve put together a list of some of the most common credit card problems and how you can avoid them.
Not Shopping Around
One of the first issues you may face is getting the wrong credit card for your needs. Before applying for any credit card, it’s a good idea to first shop around to see what’s available and what it takes to qualify for each card. Another issue is getting the wrong credit card—maybe the card you chose doesn’t fit your lifestyle, etc. Then you end up cancelling the card. Credit card rejections and card cancellations can lower your credit score.
So, first take a look at your lifestyle, your spending habits and income before applying for a credit card. If you have existing credit card debt go for a balance transfer credit card. Make sure that you meet the qualifications of the card you’re applying for before you apply. Get the right card(s) to fit your life and avoid card rejections and cancellations.
Late Credit Card Balance Payment
Most people believe being late with their credit card payment isn’t a big deal. However, it could have major consequences. Late payments result in late fees being added to your bill, which in turn has a negative impact on your credit score. A lowered credit score can mean you’ll have a harder time getting loans (such as car loans or mortgages). You’ll also have a hard time applying for additional credit cards.
To avoid this problem, try setting up automatic payments to cover at least the minimum payment required on your credit card bill each month. This way your card will be paid on time each month; if you use automatic payments, remember to ensure there’s enough in your bank account to cover your monthly credit card payments.
Only Making the Minimum Payment
Another common mistake is to only make the minimum payment required by your card each month. This method of repayment quickly leads to carrying a balance and higher interest rates. While paying the minimum allows you to avoid late fees, don’t forget that when you don’t pay off your card each month, you’ll begin to carry a balance. This carried balance will result in increased debt due to the interest charged, which compounds the problem of paying off your card.
Avoid this problem by paying off your balance each month. Take a look at your monthly spending and make sure you’re not spending more than you can afford to repay each month. Another option you can try is setting up your automatic payments to cover not just the minimum payment, but to cover your entire credit card bill each month. This way, you’ll start with a clean slate each month and avoid costly interest rates and improve your credit score.
Using Cash Advances
Sometimes you need a little cash to pay for a meal out or a little gas in the tank, etc. It’s easy to reach for your credit card and get cash from an ATM. However, it’s important to keep in mind that cash advance fees can be expensive on most credit cards. Cash advances also come with higher interest rates than the interest charged on purchases, and you’ll start paying that interest immediately.
To avoid this problem, consider using your debit card to get cash from an ATM. The debit card takes the cash straight from your own account, and there’s often no fee if you use your bank’s ATM network for the withdrawal. By using your debit card, you’ll avoid the expensive cash advance fee and higher interest rate and save money in the long run.
Closing Out Cards
There’s a lot to know about credit cards—for instance, did you know that closing a credit card can harm your credit score? You may have a card you’ve paid off or are no longer using—so it seems like a good idea to cancel the card. However, this can affect an important factor of your credit score—your utilization rate (your credit card balance divided by your credit card limit), and the average age of your accounts. Lenders look for a low utilization rate and a long credit history—meaning you don’t use your cards too often and that you’ve had the cards for a long time. This factor is affected when you cancel credit cards—you could damage your credit score by cancelling your card(s).
Rather than cancelling your cards, put them away in a safe and take them out to use once in a while and pay off the balance immediately. By continuing to use your cards, you’ll show your lenders you’re responsible with your credit and are able to maintain a long credit history. This way you’ll maintain a healthy credit score in the long term.
Spending Too Much—Maxing Out Your Cards
We’ve already taken a look at what your utilization rate is and how it can affect your credit score. Did you know that maxing out your credit cards—spending too much—can also negatively affect your utilization rate and credit score? Spending your entire allotted credit limit on one or more cards will raise your utilization rate, which then leads to a lowered credit score. Your credit score can recover as you pay down your credit card balances, but you first have to stop creating more debt.
Not only this, but you may face overdraft fees if you overspend your credit limit. All of this activity leads lenders to look at you as a credit risk, which lowers your credit score.
A good rule of thumb to avoid these issues is to only spend up to 30% of your credit limit and no more. Sticking to a budget can help you manage your spending and keep you in the 30% range of your credit limit. You’ll not only avoid overdraft fees, but you’ll protect your credit score, too.
These are some of the most common credit card pitfalls you can face. Most of these issues are avoidable if you take the proper steps to live within your budget, apply for the cards that you qualify for, pay your credit card bill on time, etc. One more tip—you can also do a balance transfer to help pay off your credit card debt even faster and with lower interest rates.
As you can see, responsible use of your credit cards can actually help your credit score over the long term. Follow the easy guidelines above, and you’ll enjoy a healthy credit history and avoid the most common credit card pitfalls.
Byron Simpson is a qualified business/finance writer expert in investment, debt, credit cards, Passive income, financial updates. He advises in his blog finance cent.