In the world of personal finance, there aren’t many topics that are more divisive than credit cards. Some experts and writers suggest that you should never use credit cards. Others, like myself, talk about the benefits of using credit cards.
Regardless of where you stand on the issue of credit cards, there is no denying that they can cause problems when they are not used properly. Any mention of the perks of credit cards comes with the assumption that the credit cards are being used correctly.
With that in mind, let’s take a look at some of the most common credit card mistakes that are made. Be sure to avoid these mistakes if you are a credit card holder.
1. Spending Too Much
Credit card debt almost always comes with a high interest rate. It’s one of the easiest types of debts to rack up, and one of the more difficult types of debt to pay off (thanks to the high interest rates).
Use credit cards only to buy things that you need and spend only what you will be able to pay in full at the end of the month. You should strive to carry no balance on your credit card from month-to-month. If you pay the balance in full each billing cycle, you won’t have to pay any interest and you won’t be hit with late fees.
One of the problems that some people have is they change their spending habits when they are using a credit card. Your spending habits should be the same with a credit card as they are with cash. If you spend money too easily when you’re using a credit card, you should re-evaluate whether you need that credit card or if you would be better off without it.
Personally, I’m not a big fan of the logic that credit cards are bad just because some people choose not to use them effectively. Credit cards aren’t the problem. They can be a great resource when they are used correctly. The way we use them is what can cause problems. If you can use a credit card properly and avoid debt, there’s no reason why you shouldn’t have one.
2. Making Only Minimum Payments
Your credit card statements will show the minimum payment that you need to make for that billing cycle in order for your account to remain in good standing. Unfortunately, a lot of people get in the habit of only paying the minimum balance.
If you only pay the minimum balance it will take forever to pay off your credit card debt, and the things that you buy with credit will wind up costing you exponentially more than you intended.
Instead of paying the minimum, aim to pay the entire balance each month. If you already have credit card debt and you can’t pay the entire balance right now, pay as much as you can, which is hopefully a lot more than your minimum payment.
→ Checkout out our debt payment worksheet to help track your debt payoff.
3. Paying Late
Every time you make a late payment you will be hit with a late fee. As of 2019, credit card companies are allowed to charge late fees up to $28, or up to $39 for repeat violations. It may not seem like a large amount of money, but if it happens a few times with a few different credit cards, it can quickly become a significant amount of money.
Also, keep in mind that the fees are in addition to the interest that you’ll be charged. To make matters worse, you’re getting nothing out of those late fees. They are not paying down your balance or doing anything positive for you. As a result, they should be completely avoided.
You can avoid late fees by setting up automatic payments. If automatic payments aren’t a good option for you, use an app like Personal Capital to get reminders about upcoming payments (you may be able to set up email or text reminders directly from your credit card company). You can also put due dates on your calendar or use or our bill pay checklist to keep track of due dates so you don’t miss a payment.
4. Maxing Out Your Credit Cards
Your credit card will have a credit limit that is based mostly on your income and your credit history. It can be impacted by your overall credit history, as well as your history with that particular credit card.
There are a few important reasons why you should not max out your credit cards.
It can hurt your credit score. If your credit card accounts are maxed out, it’s a warning sign to creditors and your credit score can drop. You will be a greater risk to creditors because you have less of a buffer. Your available credit accounts for a large part of your credit score, so you want to be sure that you have plenty of room.
You’ll have a harder time paying it off. The more debt you have, the harder it will be to pay it off. It’s a simple concept, but still important.
It can hurt your ability to get approved or credit. If your credit card accounts are maxed out, you’ll be more likely to get rejected for a mortgage, car loan, or any other type of credit.
You won’t be able to use it when you need it. A maxed out credit card is doing you no good. You won’t be able to use the credit card when you need it if you have no available credit.
5. Letting Debt Charge Off
The credit card company can charge off your account after 180 days of not making the minimum payment. Despite the way it may sound, a charge off does not mean that you are no longer responsible for the debt. Really, a charge off is just for accounting purposes for the creditor. They can still legally come after you for the money up to the statute of limitations, which is determined by your state.
A charge off is one of the most damaging things you can do to your credit score and it will remain on your credit report for seven years. After the charge off, you can help to repair your score by making partial payments or by completely paying the debt, but it is obviously best to avoid it in the first place.
6. Not Using a Good Rewards or Cash Back Card
Despite the problems that can be associated with credit cards, they can actually be extremely useful for you if you are disciplined and use them properly. If you are going to be using a credit card, you might as well use one that will give you cash back, travel points, or some type of rewards.
If you use a credit card for common purchases like groceries, gas, and regular monthly bills, you can easily rack up a significant amount or rewards each year.
Most cash back credit cards will pay 1% of your purchases, but there are some that offer higher amounts of cash back. I use a cash rewards card that earns 2% cash back on any purchase. The difference between 1% and 2% may seem small, but it doubles the cash back, which really adds up quickly.
→ See this page for an updated list of the best cash rewards credit cards.
7. Using the Wrong Card
Having a good rewards credit card is a great start, but you may have more than one credit card, and if so, you should be using the best credit card for each specific purchase in order to maximize the rewards that you earn.
For example, I use my everyday card to earn 2% cash back, unless I can beat that with another credit card. Here are a few of the other credit cards that I use frequently:
- Chase Freedom – 5% cash back on purchases in categories that rotate each quarter
- Amazon Prime – 5% cash back on purchases at Amazon
The Chase Freedom and Discover It cash back categories rotate, so I’ll keep track of the current rewards and use each card when it makes sense. For example, this quarter the Chase Freedom card is paying 5% cash back at grocery stores and home improvement stores, so I will use that card for those purchases. This quarter the Discover It card is paying 5% cash back for gas purchases, so I use it any time I buy gas.
If you have a few different cards and you use the best one for each purchase, you can maximize your rewards.
→ Related reading: How to Stack Rewards and Cash Back
8. Spending More Just to Get Rewards
Although cash back and rewards cards can be great resources, you should only use them for purchases that you need to make anyway. I need to buy groceries and gas, so I might as well earn rewards for those purchases. But I don’t need to go out and spend extra money just to earn rewards.
If you find that you’re spending more money as a result of chasing after rewards, you should either change your habits or get rid of the credit card altogether.
9. Applying for Too Many Cards in a Short Period of Time
If you apply for too many credit cards close together, it can put up a red flag to creditors and your applications may be rejected.
Each time you apply for credit or a loan there will be a hard inquiry on your credit report, which can reduce your credit score slightly (usually 5 points or less). If you’re approved for the card, your available credit will increase and that drop in your score may be offset. Also, the impact will lessen over time, so you don’t need to completely avoid hard inquiries.
Too many hard inquiries at once can reduce your score more significantly, and it also increases the chance that your application is rejected. Creditors are likely to wonder why you are applying for multiple accounts close together, and they may want to avoid the risk.
Of course, there are a lot of factors that can play into it (like your existing credit score and your available credit), but as a general rule of thumb, you should wait a few months between applications.
10. Not Closely Monitoring Your Statements
A common mistake that many people make is not paying enough attention to your monthly statements. Check each statement to make sure that you recognize every charge and that there are no mistakes.
Make sure that refunds are applied to your account, that any canceled subscriptions are no longer being charged, and that there are no unauthorized charges.
Unfortunately, identity theft is common, so you should be checking to make sure that no one is using your credit card to make purchases that are not yours. If you see any issues, call the credit card company as soon as possible.
11. Not Reporting Lost or Stolen Credit Cards Immediately
If you realize that you’ve lost a credit card or that it has been stolen, report it to the bank immediately. They’ll close or freeze the account to protect you (and themselves) from any unauthorized charges.
Federal law states that you cannot be held liable for any charges that are made after you report the credit card as lost or stolen. However, you can be responsible for up to $50 of charges made before it is reported. (These laws apply to credit cards. The laws for debit cards could leave you on the hook for a lot more.)
The $50 that you could be held responsible may not be a big deal, but dealing with unauthorized charges can create some extra work and headaches for you, so it’s best just to report it right away and avoid those issues.
12. Closing an Account Prematurely
As I mentioned earlier, your available credit can have a big impact on your credit score. If you close a credit card account it can reduce your available credit and it can actually hurt your credit score.
That doesn’t mean that you should never close a credit card account, but there are a few things to keep in mind.
- Don’t close all of your credit cards. If your credit availability drops too low it will hurt your credit score.
- Try to avoid closing your oldest accounts. Having accounts with longer history can be helpful for your credit score, so try to avoid closing the oldest ones.
- Close accounts that are costing you money. If you have a credit card with an annual fee and you don’t use it enough to get benefits that offset the annual fee, that is a card that you should cancel.
13. Co-Signing for Someone Else
Most major credit card companies do not currently accept applications with co-signers, but some do. Be very careful before co-signing on a credit card for anyone else, including family members. As a co-signer, you will be responsible if they do not pay, and your credit can be hurt if the payments are late or if the account charges off. As a co-signor, you have a lot to lose and very little to gain.
Many people co-sign because they feel the need to help someone else or because they don’t realize that they are actually agreeing to pay the debt if the borrower does not pay.
Credit cards can be a great resource if they are used correctly, but you need to be sure that you are avoiding these common pitfalls. Like other aspects of personal finance, disciple and care will go along way towards ensuring that you are on the right track.