Credit cards can be tricky, and as is the case with anything else, people make mistakes when using them. The trick is to learn from these mistakes and avoid making them again. In order to help facilitate this and to help you learn from the missteps of others, we compiled this list of the most common credit card mistakes. So read up and be on your way to sturdier financial footing.
Mistake: Being unaware of foreign transaction fees
Why: Credit card companies often charge fees of 2-3% for each purchase you make in another country. While these fees can lead to high costs, they can be avoided if you open a no foreign transaction fee credit card before traveling.
Mistake: Accepting a foreign merchant’s offer to convert a purchase total into U.S. dollars
Why: Foreign merchants often offer to covert purchase totals into U.S. dollars, ostensibly for convenience sake. However, they typically charge inflated conversion rates for the service, so make sure to only sign checks and receipts listed in terms of the local currency.
Mistake: Forgetting to call your credit card company before traveling
Why: If you do not inform your credit card issuer of your credit plans, it might suspend your account due to suspicious charges. In addition, when you call you can get the toll-free number with which you can contact your issuer should you run into any trouble while abroad.
Mistake: Failing to carry your passport when making purchases with a credit card in Europe
Why: European credit cards have more advanced security features than American cards, so you may be required to show your passport in order to complete a transaction.
Mistake: Opening a credit card at the wrong time
Why: Each time you open a credit card, your credit score takes a slight hit, the effects of which last about six months. As a result, you should avoid opening a new card within six months of applying for a loan, buying a car, or interviewing for a job with an employer who reviews financial records during the hiring process.
Mistake: Forgetting about balance transfer fees
Why: Consumers often become so enamored with 0% balance transfer offers that they forget there’s often a fee for transferring a balance. Both interest rates and balance transfer fees impact the financial benefit of a balance transfer, so you must consider them in combination.
Mistake: Believing that you can only transfer credit card debt to a balance transfer credit card
Why: In theory, you can transfer any type of debt to a balance transfer credit card. While, some issuers, like Capital One, are beginning to place limits on the types of debt you can transfer, it’s worth it to look into other companies’ policies in order to save money on the interest from an auto loan, for example.
Mistake: Giving others charging privileges
Why: Whether you make someone an authorized user on your account or you simply let them borrow your credit card, you are responsible for the charges they make.
Mistake: Paying unnecessarily high interest
Why: Not only should you try to pay your balance in full each and every month, but there are steps you can take to ensure you’re getting the best possible interest rate.
Mistake: Taking cash advances
Why: Credit card companies charge fees of around $10 for cash advances and begin applying interest rates typically above 20% immediately upon the completion of such a transaction.
Mistake: Exceeding your credit limit
Why: While you should opt-in for the ability to exceed your credit limit, you must only allow your spending to surpass it in the case of a true emergency because it will hurt your credit standing.
Mistake: Spending beyond your means
Why: If you spend more than you can afford to pay, you’ll end up in debt, paying high interest costs and damaging your credit standing.
Mistake: Paying below the minimum amount required
Why: Credit card companies make no distinction between payments below the minimum required and no payment at all, meaning a payment less than the minimum does not stop the advancement of delinquency. Therefore, if you don’t have enough to make a minimum payment, you should wait to make a payment until you do.
Mistake: Ignoring your problems
Why: Most credit problems (e.g. debt, delinquency, etc.) get worse when left alone, so it’s in your best interest to directly address any such problems as quickly as possible.
Mistake: Carrying a balance with a business credit card
Why: Business credit cards are not covered by the CARD Act provision that makes it illegal for credit card companies to apply increased interest rates to existing balances. Therefore holding debt on a business credit card is risky and can result in suddenly increased costs as a result of a credit card company raising its interest rates in order to quickly increase profits.
Mistake: Misunderstanding payment allocation
Why: If you have multiple balances on a credit card (e.g. you made a balance transfer) only the amount of your payment above the minimum will be applied to the balance with the highest interest rate. Therefore, you should avoid carrying multiple balances on the same credit card. Instead, have a credit card for each one of your needs (i.e. everyday spending, a balance transfer, business expenses).
Mistake: Having the wrong credit card for your credit goals
Why: While many people get distracted by rewards, certain types of credit cards are best suited to meet certain credit needs. If you have credit card debt, get the lowest interest rate possible; if you bad credit, get a credit improvement credit card, like a secured credit card; if you do have excellent credit and you pay your bill in full each month, then worry about rewards.
Mistake: Opening the wrong rewards credit card
Why: You should only get a travel rewards credit card if you travel often and are therefore able to redeem the miles and points you earn frequently. If you can’t, get a cash back credit card with the rewards structure that best meets your spending habits.
Mistake: Not paying off a store card
Why: Store cards often provide great deals and savings, but if you have to pay interest on the purchases you make, these savings are effectively erased.
Mistake: Using a debit card instead of a credit card for fraud protection purposes
Why: There is no difference in the fraud protection provided by debit cards and credit cards. In fact, credit cards make fraud easier to deal with because they give you more time between when a purchase is made and when money is removed from your bank account.
Mistake: Using a No Preset Spending Limit (NPSL) credit card or charge card
Why: Many people think NPSL means that a card has no limit. However, all it really means is that a card’s spending limit is determined on a month-to-month basis and that the issuer will not inform you or the major credit bureaus of exactly what it is at any time, thereby creating the potential for your card to get unexpectedly declined and for your credit score to fall because of deceptively high credit utilization.
Mistake: Spending all of your available credit
Why: Credit scoring agencies use a balance-to-available credit ratio called credit utilization as part of their credit score calculations. Therefore, spending most or all of your available credit can have a negative effect on your credit standing.
Mistake: Using the wrong credit card to improve your credit
Why: If improving your credit standing is your goal, you should focus on getting a credit card with the lowest fee structure possible and either pay your bill in full or simply refrain from using it. This will prevent credit improvement from becoming a cost-intensive endeavor and will allow you to lock the card in a drawer if you so choose. Neither interest rates nor rewards should be a priority because rewards typically result in higher fees and you must make sure to pay your balance in full each month.
Mistake: Being unaware of your state’s statute of limitations for debt
Why: The statute of limitations for debt is the time during which debt is relevant under the law. Once it expires, any lawsuit brought to recoup money that you owe will be dismissed, as long as you make it clear to the court that this debt is “time barred.”
Mistake: Thinking that the credit card you get for business spending depends on your company’s credit standing
Why: Since you are personally liable for a business credit card, the particular card you qualify for depends more on your personal credit standing than that of your business.
Mistake: Leaving a small balance each month to help your FICO score and garner a higher credit limit
Why: For some reason people believe that carrying a small amount of debt garners the favor of their creditors because it allows them to earn profits from interest. This is untrue, however, as carrying a monthly balance simply increases your costs.
Mistake: Believing that a credit card will only benefit your credit score if you use it
Why: Credit scoring agencies value low credit utilization as well as consumers who do not spend beyond their means. Therefore, as long as you maintain a credit card at zero balance and in good standing, your credit score will be positively affected.
Mistake: Thinking that the length of time long negative information stays on your credit reports resets at the time you make a payment
Why: Negative information about credit card debt generally remains on your major credit reports for a period of seven years beginning 180 days after the time you entered delinquency. It does not reset for any reason.