3 Credit Card Mistakes That Could Cost You a Fortune
by Matt Frankel, CFP | Dec. 24, 2018
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Credit cards can be excellent tools when used properly, but they can be a financial nightmare if they aren't. If you use credit cards incorrectly, you could easily spend hundreds or even thousands of dollars more than you need to on interest, fees, and other charges. With that in mind, here are three especially costly credit card mistakes to avoid at all costs.
Playing the "bonus game" the wrong way
You may have noticed that some of the sign-up bonuses being offered by credit cards are pretty valuable. In fact, I recently got rewards points valued at about $600 from opening a new credit card a few months ago.
Competition in the credit card industry has never been higher, and there are indeed some lucrative offers out there. However, I'd urge you to be careful when accepting these offers, especially one that has a high required spending threshold.
As a hypothetical example, let's say that a certain credit card is offering you a 50,000-point bonus (worth $500 in travel). If you charge $5,000 worth of things you were going to buy anyway and pay off the balance in full before interest starts to accumulate, you effectively just got $500 for free.
On the other hand, if you charge $5,000 worth of purchases and carry the balance, the interest you'll pay can negate that $500 bonus really quick. If the card has an 18% APR, it takes less than seven months for a $5,000 balance to accumulate more in interest than the bonus is worth.
The point -- taking advantage of the best credit card rewards offers can be a great idea if and only if you pay your balance in full each month. In fact, it's very easy to get in trouble by taking advantage of a few different offers, so be careful when trying to play the "introductory bonus game."
Taking a cash advance and then carrying the balance
There are three main reasons why a cash advance can be more expensive than you think.
First, many cards have one APR you'll pay for purchases and another (higher) APR you'll pay for cash advances. As an example, one of my credit cards has a 18.74% APR for purchases right now but has an APR of 24.74% for cash advances -- 600 basis points higher.
Second, cash advance interest generally starts to accumulate immediately. When you make a purchase on your credit card, you get a grace period where as long as you pay the new balance off before the due date, you'll pay no interest. The credit card I just mentioned states in its cardmember agreement that "For Cash Advances and Special Transfers, we will start charging interest on the transaction date."
Finally, there's typically a fee for taking a cash advance, in addition to the higher interest rate that kicks in immediately. This is usually calculated as a percentage of the advance with a certain minimum. For example, your credit card may charge you 3% of the cash advance or $10, whichever is more.
So, think twice before taking a cash advance. It could cost you more than you think.
Not taking advantage of balance transfer offers
I mentioned earlier that competition in the credit card industry has never been higher. In addition to generous introductory bonuses, this has resulted in some excellent opportunities to transfer high-interest balances and/or make new purchases without paying interest for a long time. In fact, there are offers on the market right now that will let you pay no interest until well into 2020.
Consider this example. Let's say that you owe $5,000 on a credit card and that you're paying 18% interest. If you plan to pay off this debt over the next 15 months, you'd end up paying $374 per month which translates to a total of $620 of interest. On the other hand, you can find a balance transfer credit card with a 0% intro APR for 15 months and no balance transfer fee. With a card like this, you could pay off the same balance in the same amount of time with no interest whatsoever.
Technically, not taking advantage of these offers won't necessarily cost you any more money than you would otherwise spend, but it could certainly save you lots of money.
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About the Author
Matt is a Certified Financial Planner® and investment advisor based in Columbia, South Carolina. He writes personal finance and investment advice, and in 2017 he received the SABEW Best in Business Award.
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