If you’re like most consumers today, you only think about your credit card companies when you are paying the bill each month. However, what you don’t know about your credit card terms can be costing you a significant amount of money each year. Below are just a few of the common credit card mistakes consumers make and how you can avoid them.
Top credit mistakes and how to avoid them
1. Paying only the minimum payment each month.
Credit card companies make it easy to just pay a portion of your total bill each month. Most even put that minimum payment figure in the “amount due” box. However, just paying the minimum payment each month will cost you a bundle in extra interest payments and cause you to spend years paying off your bill.
You might even end up paying more in interest than you did for the original purchases. For example, if you pay the minimum payment every month on a $3,000 bill at 15% interest and a 2% minimum payment, you’ll spend 16 years and 4 months paying off that bill and end up paying $3,640 in interest.
Paying just the minimum on your credit card bills can also affect your ability to get a new loan, such as a mortgage loan. Increasingly, lenders are looking at how credit card users pay their bills, not just whether they are delinquent.
2. Paying your bill late.
Of course, paying your bill late is even worse than paying the minimum. Even paying a few days late can affect your credit score and even cause your interest rate to increase. Plus, you’ll incur a late fee, which can be up to $38 per month. Some companies reserve the right to raise your rate if you have even one late payment with them or (get this) any of your credit card companies.
One good way to avoid this is to set up automatic reminders via your finance software program, such as Quicken. If you don’t have one of these programs, you can use Google’s date book to set reminders.
3. Not checking your monthly credit card statement.
Not checking your credit card statement every month and simply paying the balance can cause you to pay for a number of invalid charges. Maybe a merchant submitted a purchase twice by mistake. Maybe you are still being charged monthly for that subscription service your canceled.
Or, maybe someone has gotten a hold of your card number and is using it without your authorization. If you use your card a lot during the month, you may not notice this extra activity.
4. Maxing out your credit card limits.
You might think that if you have credit, you might as well use it. However, using more than 30 percent of your available credit can cause a major hit to your credit scores not to mention taking away your safety net in the event of an emergency. Maxing out your available credit can also make it difficult to obtain new credit or increase the interest rate on that new credit.
What’s more, when you get close to your limit, you also run the risk of incurring “over-the-limit” fees, since many companies will simply tack on another (rather large) fee rather than declining your transaction.
5. Ignoring your credit card terms.
Yes, those pages of credit card terms are boring and difficult to read with their small print and legal jargon. However, there are gems of information that you need to know in those paragraphs. For instance, they tell you how your credit card company handles and calculates late payments. Are you immediately charged a late fee or do you have a few days “grace period”.
Speaking of grace periods, these pages will also tell you when the company begins charging interest on your purchases. In many cases, but not all, you don’t incur any interest expense if you pay your balance off in full every month. Another essential bit of information contained in the terms is the amount of interest on your card balance. Don’t just assume that you still have the same rate as when you applied for the card.
You may have signed up during a promotional period that has since expired. Or, a late payment may have upped your interest rate. Since these terms change periodically, it’s wise to review them at least twice a year. While you’ll generally get a copy in the mail each time they change, you can also access your terms via your credit card company’s website.
Not knowing your card’s terms can also mean that you are missing out on some benefits. Does your card offer rental car liability protection or cell phone insurance? Do you get mileage points or cash back for certain purchases? Sometimes, these benefits are only good at some retailers and not others. While it’s never a good idea to spend extra just to get the benefits, knowing the terms of these offers will allow you to maximize your card benefits on things you were going to purchase anyway.
6. Getting a cash advance on your credit card
This may seem like a painless way to access extra cash if you are running short at the end of the month or face an emergency you need cash to pay. Up to certain limits, you can even get a cash advance from an ATM 24 hours a day. However, most credit card companies charge a higher interest rate for cash advances than they do for purchases. Plus, in many cases, there is no grace period for cash advances, so you’ll start incurring interest from the minute you access those funds.
To make matters more confusing, many credit card companies apply your payments to purchases first, then cash advances, so you’ll carry that higher interest transaction on your account until you pay the entire bill (cash and purchases) in full.
Credit cards are undeniably useful. They let you make large purchases without carrying a lot of cash. They can help you establish a good credit history, and they can make it a lot easier to rent a car or check into a hotel when you’re traveling. Some cards even offer incentives and cash back for using them. However, it’s easy to fall into credit card traps if you aren’t careful.
Be sure to keep up on your card’s terms and conditions, pay off your balance in full whenever possible and always pay your bill before the due date to avoid paying high penalties in interest, late fees, and a diminished credit score.
Susan McCullah is an established writer who has created dozens of informative articles about credit scoring, identity theft, budgeting, taxes, debt, and finance. She has worked in the Credit Reporting industry for 15+ years and is FCRA certified. Susan regularly conducts in-person presentations and webinars on the topics of credit scoring formulation, raising credit scores, and identity theft.
