Credit cards, used wisely, can be an important tool in your financial toolbox. But with Americans’ credit card debt at or near record highs, it’s clear that some of us aren’t always making the best decisions when it comes to how we treat our plastic.
“First of all, I do think it’s really important for you to have credit. Without credit, you could be punished in many areas of your life,” says money expert Clark Howard. But he continues, “It’s important to remember that getting credit requires you think through how you’re going to use it”
With that in mind, here are some common mistakes people make when it comes to using credit cards.
Here are some things NOT to do with your credit cards
Missed payments on a credit card can hurt you both in the short and long run. “After missing a payment, you’ll likely see two charges: A late fee (usually between $25 and $35) and interest on the balance,” according to CreditKarma.com. That’s the short term damage.
The longer term hit comes with your credit score. “If you are late 30 days on a credit card, car loan or mortgage payment it’s very likely that late payment will appear on your credit reports, and your credit scores could drop significantly; a drop of 50 points or more would not be unusual,” says credit expert Gerri Detweiler.
The bottom line is that it’s important to make a payment to your credit card issuer each month, even if it’s just the minimum one.
Carry a maximum balance
Carrying a maximum balance on your cards can ding your credit, since what’s called “Credit Utilization” or “Credit Use Ratio” is one of the factors that goes into determining your score. In fact, it accounts for 30% of it, according to CreditCards.com.
Use CreditKarma’s free credit score simulator to see exactly what effect maxing out your card or cards can have on your credit score, which can be so important when it comes to everything from buying a new car or house to your insurance premiums and even getting a job.
Use it to withdraw cash
When you use a credit card at an ATM, instead of drawing from an account with a cash balance, you increase the debt on your card. If you have a $500 balance and withdraw $200 in cash, you would then have a $700 credit card balance. But beware that all balances are not treated equally.
If you think using your credit card at an ATM sounds like a good idea, stop to look at the fees before you insert your card into the slot. There are two costs to consider associated with using a credit card at an ATM.
First, you may have to pay a cash advance fee when using your credit card at an ATM. Depending on the credit cards you have to choose from, that could easily cost you 3% of your total withdrawal in addition to fees charged by the ATM. For a $200 withdrawal at an ATM with a $4.00 fee, you would pay $10 to withdraw that cash.
Next, you may find yourself hit with a higher interest rate from a cash advance than standard purchases. Even some of the best credit cards charge more for cash advances. If you don’t pay off your balance in full, that is going to become a very expensive cash withdrawal very quickly.
Remember that you should always pay your card off in full every month if you can to avoid finance charges.
Buy things you don’t need
This one should be a no-brainer, but we’re all human and sometimes a reminder is in order.
Just because you have credit available doesn’t mean you should use it, especially on things that aren’t necessities. Yes, sometimes it’s nice to treat yourself, but you should always make sure that you are going to be in a position to pay a fair price for those things — which means not racking up debt that you could be paying interest on for years to come.
Lend it out
Around 35% of people who lent their credit cards to other people have suffered financially because of it, according to a recent survey.
The findings from a CreditCards.com poll show that while card-holders may generally be responsible consumers, you can’t always count on friends and relatives to be the same.
According to the survey, the most common things that happened when people let others borrow their plastic were: Going into debt (19%), not getting repaid (14%) and having their cards lost or stolen (10%).
Just don’t do it.
Share information about it on social media
This one might seem like another no-brainer, but it goes beyond taking a picture of your card and posting it to Facebook.
“Never share anything on social media that you wouldn’t want the world to know,” Bruce McClary, the vice president of communications for the National Foundation for Credit Counseling told Credit.com. “Posting updates that indicate where you bank, how much you spend and what credit cards you [have] allows online predators to have useful tools that can help them steal your identity and your money.”
The bottom line is that in this case, as in many, modesty is the best policy.
Have you made mistakes with your credit cards that taught you a valuable lesson? Let us know in the comments below or on Facebook!
More Clark.com credit card stories you might enjoy:
- Clark Howard: Here’s my philosophy on credit cards
- How to improve your credit score by 100 points in 30 days
- How to lower your credit card interest rate