Credit cards are a financial tool that can lead to great rewards and benefits, but if mishandled can lead to huge costs, fees, and damage to your credit.
If you can avoid a few fatal mistakes, you can jump into the world of credit without worry. Be sure to avoid these five credit card mistakes when using and managing your favorite cards.
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Credit cards: 5 big mistakes than can lead to huge headaches
Late and missed payments
The first sin of credit cards is missing a payment due date. Late payments lower your credit score and remain on your credit report for seven years. Because they take so long to go away and can’t be easily fixed, if at all, you should avoid late and missed payments 100% of the time.
Avoiding late credit card payments is easy. Just signup for your card issuer’s online banking, which you should do anyway, and sign up for payment due alerts. Then pay attention when the email arrives and it’s time to make your monthly payment.
To make things even easier, you can sign up for automatic payments through your card issuer’s website or your bank’s bill pay system. Just be careful not to overdraft your bank account with an automatic payment.
Some credit cards lure you in with 0% APR introductory periods, and banks hope that will lead to you racking up big credit card balances and paying boatloads of interest. You should avoid paying credit card interest if at all possible. It is a needless expense that provides you nothing in return. At least with student loans, you get an education out of it. With credit card interest, you are paying more to finance the cost of general spending.
Avoiding interest is as easy as avoiding late payments. You just have to make sure that payment is big enough to pay off your balance in full each month to avoid interest. You read that right: If you pay off your bill in full every month before the due date, you don’t owe any interest.
This means you can’t spend more than you earn, so you have enough cash left over every month to pay your bill in full. A trick I’ve used to avoid giant surprise credit card bills is paying my card balance in full every payday. I found the bi-weekly payments aligning with my paychecks make keeping my balances low much easier.
Forgetting annual fees
In some cases, signing up for a credit card with an annual fee makes more financial sense than a card with no annual fee. For example, travel and cash back rewards credit cards pay you valuable rewards often worth more than the annual fee. In this case, getting a card with an annual fee can be the right move. Sometimes the signup bonus alone is worth more than a few years of annual fees combined!
To build and keep a high credit score, it is best to keep credit accounts open as long as possible. If you keep an old account with an annual fee open, however, it is probably not worth the cost. In these cases, you have a few options to avoid that annual fee.
First, you can call the credit card issuer and ask if they would be willing to waive the fee. If they say no, you can either close the card or downgrade it to a similar car with no annual fee. When you downgrade, you often lose the most valuable benefits of a high end card, but you can avoid the annual fee while helping boost your average age of credit.
If you pay your balances off in full every month, which you should be doing anyway, you are a great contender for rewards cards. The best credit cards pay you back in cash back worth up to 5% on bonus category purchases or travel rewards that can be worth even more. If you are going to pay for something, it might as well pay you.
The average household has a roughly $64,000 annual budget, according to ValuePenguin. Taking out housing and other expenses that can’t easily go on a credit card, that leaves about $35,000 in annual spending. If you were to use a 2% cash back rewards card and spend that much per year, you could earn $700 per year in cash back. That is the simplest way to turn your spending into cash in your bank account. The Double Cash credit card from Citi® offers 1% cash back on each purchase plus 1% when you pay your bill for an effective 2% cash back rate.
If you are a frequent traveler, you can often get more value per dollar spent than with a cash back credit card. You can do this with a premium travel rewards credit card like the Chase Sapphire Preferred® or Amex Platinum card, where you earn in the form of points and can then use those points for travel, or transfer them to a favorite airline or hotel partner for free and discounted bookings.
Spending like it doesn’t count
Perhaps the biggest mistake you can make with a credit card is spend more than you can afford. This is very common, and the average household carrying credit card debt owes $15,000, according to NerdWallet. At 20% interest, that is about $3,000 per year in credit card interest payments.
Spending responsibly makes doing almost everything on this list easier. It doesn’t matter if you use cash or a debit card or a credit card. Ultimately you have to pay for every purchase you make. With credit cards you have an opportunity to pay spend more, but you’ll end up paying for it eventually, plus interest.
Use credit cards to make money, not lose it
You should always be self-aware and know your own spending and debt management habits. If you have a history of big spending and missed payments, you should probably steer clear of credit cards for regular spending and just keep them for emergencies. But if you have a perfect record, you can use credit cards for good. Just be sure to avoid these five critical credit card mistakes and you’ll be in great shape.