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For most people, credit cards are an indispensable tool. They are a convenient and secure payment method that also allows you to earn rewards and build credit that will help you later in your financial journey.
But as a tool, credit cards must be used with care. Otherwise, you could easily make mistakes that cost you money, ruin your credit, or land you in credit card debt.
The typical consumer has three open credit cards and a balance of $5,525 in 2021, according to a report from credit bureau Experian. If this sounds like you, it may be time to reevaluate your credit card usage; Carrying a balance on your card from month to month can damage your credit and rack up debt.
In addition to carrying a balance on your card, here are the six most common mistakes consumers make with credit cards, and how to avoid them.
1. Never pay your card in full
At the end of each billing cycle, your credit card company will include your statement balance and minimum payment amount. The minimum payment is usually a small percentage of the statement balance, often 2% to 4%.
But paying only the minimum balance is one of the costliest mistakes you can make.
Paying your statement balance in full is essential, says Madison Block, senior marketing communications associate at American Consumer Credit Counseling, a national nonprofit credit counseling agency.
“Just paying the minimum will ensure you stay current on your payments, but it means interest will accrue because you’re not paying your balance in full,” says Block. “It will also extend the amount of time you are paying off your debt. Credit card interest rates can be high, so if you don’t pay your balance in full each month, interest can add up quickly.”
For example, if you have a credit card with a balance of $1,000 and 16% APR, and you only pay the minimum payment of 2% of the balance each month, it would take you 126 months to pay off your debt. And you would pay a total of $994.19 in interest, almost as much as the original balance.
Carrying a balance on a consistent basis will also increase your credit utilization ratio (your total debts divided by your total available credit), which could lower your credit score.
If you find yourself with a large credit card balance, try using one of these expert-recommended debt settlement strategies or seek professional help from a nonprofit credit counseling agency.
To keep your credit score from going down, keep your credit utilization ratio (the amount of your total debt divided by your total available credit) low. Experts recommend keeping your credit utilization ratio below 30%.
2. Not making payments on time
If you’re juggling multiple cards, it’s easy to lose track of expiration dates. But when it comes to credit card do’s and don’ts, one of the worst things you can do is miss a payment. When you miss a payment, you may have to deal with the following consequences:
- Late Fees: Most cards charge late fees as soon as you pass your due date. Fees vary by card, but some can be as high as $39.
- Penalty APR: When you miss a payment, your credit card issuer may charge you a higher penalty APR that applies to your current and future balances.
- Damage to your credit score: A single late payment can significantly damage your credit. The exact impact depends on your current credit score and credit history, but late payments can lower your score by more than 80 points, according to credit scoring company FICO.
To avoid late payments, create calendar reminders for yourself or set up automatic payments to automatically withdraw the minimum payment from your bank account when it’s due. Even if you can’t pay your statement balance in full, be sure to make at least the minimum payment on time.
3. Sign up for too many cards
While it can be tempting to sign up for multiple credit cards to take advantage of special offers or promotions, there is a level of risk involved.
“Subscribing to multiple cards means it can be more difficult to keep track of your finances with multiple expiration dates on your different credit cards,” says Block. “Having too many credit cards also carries the risk of going into debt because it can be tempting to use those cards to overspend with money you don’t really have.”
Even if you use your credit cards perfectly, there can still be negative effects from opening too many cards at once, says Todd Christensen, education manager at Debt Reduction Services, a national nonprofit credit counseling agency.
“Every time you apply for a credit card, the issuing bank will check your credit report,” explains Christensen. “These credit checks are called inquiries. More specifically, hard queries. The more difficult inquiries you have on your credit report in the last six to 12 months, the more those inquiries will lower your credit score.”
Instead of signing up for a bunch of cards in a short period of time, be more selective. Signing up for a new card from time to time can allow you to take advantage of special offers without damaging your credit.
4. Ignore your benefits
When you open a new credit card, it’s important to understand how the card’s rewards program works, how to redeem your points or miles, and what additional benefits are available. Otherwise, you could end up wasting money, especially if your card charges an annual fee for benefits you don’t use.
“Credit cards often offer guarantees and credit protections for certain purchases, particularly when traveling away from home,” says Christensen. “Many credit cards offer free insurance coverage on rental cars for which rental car agencies charge $15 to $25 or more per day. And many credit cards come with roadside assistance, in case you get stranded somewhere or need help with a dead battery.”
Other common benefits include:
In general, cards that charge annual fees offer more benefits than those that don’t. While cards with annual fees can be a good deal as long as you use enough benefits to offset the cost, if you find you’re not using all the benefits your credit card offers, it may be time to switch to a non-annual card. -Installment card or change to another card that best suits your lifestyle.
5. Become a co-signer on Friends
If someone has no credit history or bad credit, they may need a co-signer on their credit card application to get approved. Credit card co-signers are especially common for student credit cards, where the student may need a parent, relative, or friend over the age of 21 to co-sign the card.
If you have good credit, you might want to help out and co-sign a credit card application for a friend. But doing so could ruin your finances and your relationship. As a co-signer, you are responsible for the payments if your friend falls behind and could end up being responsible for the debt if he doesn’t pay the balance due. If your friend misuses their credit card, your own credit score could also be affected.
If you want to help your friend build credit, consider these alternatives:
- Add them as an authorized user to your own card: If you have good credit, you can help your friend by adding them as an authorized user to your account. They will benefit from your credit history and good habits, but you can set spending limits or not give them access to your card. They will still improve your credit simply by being added to the account.
- Encourage them to open a secured card: A secured card is a good match for someone with bad or no credit. Requires a security deposit that serves as the user’s credit limit. Over time, a secured credit card can help your loved one build their credit score and move to a traditional card.
- Find out if they are eligible for other cards: There are some credit cards that cater to people with bad credit or no credit history. They may have added fees or APRs, but your friend can use the card to establish a positive credit history and qualify for a card with better rates later.
6. Ignore APRs
While you should never aim to carry a balance, you should still pay attention to the annual percentage rate (APR) when signing up for a new credit card. The APR represents the total cost of borrowing money. The higher the APR, the more interest you’ll pay on outstanding balances.
“If you pay your balances in full each month, [the] APR will not affect your purchases,” says Block. “However, if you’re only paying the minimum or just not paying the balance in full, that’s when the interest will start to accrue and you’ll pay interest on top of the cost of your purchases.”
The average APR for credit cards assessed interest was 16.44% as of November 2021, according to data from the Federal Reserve. However, APRs on some cards can be significantly higher. For example, some credit cards for people with bad credit can have APRs as high as 36%. That high rate can make your purchase cost much more than the sticker price.
If you have to carry a balance, try to pay it off as quickly as possible. Or, you can take advantage of a balance transfer credit card to get 0% APR for an introductory period to save on interest while you pay off your debt.
In addition to the APR, make sure you know what fees your credit card issuer charges and how to avoid them. A look at a credit card’s Schumer Box will give you the basic information about the interest rate and fees, but be sure to check the fine print in the terms and conditions as well.
How to use your credit card responsibly
Now that you know what not to do with your credit card, you can avoid those common credit card mistakes and learn how to use your card responsibly. It’s helpful to think of your credit card as a way to transact, not a way to access cash.
“Don’t buy a credit card thinking of it as your emergency fund,” advises Christensen. “Savings funds are for emergencies, not for credit cards. Credit cards are for making purchases safely and comfortably”.
If you’re new to credit cards, start small to reap the benefits without overextending yourself.
“Use it only to make a small, one-time, recurring, fixed monthly purchase, like your cell phone bill, your streaming media service, or a subscription service,” says Christensen. “That way, you won’t overuse or overextend it and you’ll still get the benefits of generating activity on your card that can count toward your credit score.”