7 of the Most Common Credit Card Screwups
by Lyle Daly | Updated Sept. 16, 2021 - First published on March 12, 2021
These mistakes can hurt your wallet and your credit score.
Odds are you've met at least one person who has had a bad experience with credit cards. When used correctly, credit cards can be extremely valuable. They can help you build credit and earn rewards on purchases. Unfortunately, not everyone uses credit cards correctly.
There are plenty of ways to go wrong that can cost you money, leave you in debt, or lower your credit score. And some mistakes can take years to fix.
That's why it's important to understand the most common credit card screwups. You'll be much less likely to have problems if you know what not to do.
1. Missing payments
When you use a credit card, you always need to make your payment by the due date. A missed payment will cost you a late fee and result in interest charges. You can typically contact the card issuer and get your first late fee waived, but this is a one-time courtesy.
It gets even worse if your late credit card payment is past due by 30 days or more. At that point, your card issuer can report the late payment to the credit bureaus. This can drop your credit score by up to 110 points.
2. Only paying the minimum
Technically, you just need to make minimum payments to remain in good standing with your credit card company. But the cost of only paying the minimum is that it can take years to pay off your balance. In that time, you'll pay a substantial amount of credit card interest.
The smartest option is to pay your card's full statement balance every month. If you do this, you'll never be in credit card debt or incur interest charges on your purchases.
3. Charging too much of your credit limit
Many consumers have fallen into the trap of using way too much of their credit limit. Just because your credit card has a limit of $5,000 doesn't mean you should spend anywhere near that amount.
Remember that you'll need to pay back all the money you spend. If you can't pay in full by the due date, then you'll have to pay that debt off gradually -- and with interest.
High spending will also affect your credit utilization ratio, which impacts your credit score. This ratio is determined by comparing your card balances to your credit limits, and it's best for your credit score to keep your credit utilization at 20% or below. So with that previous example of a $5,000 credit limit, you'd want to have a balance of no more than $1,000.
4. Spending money you don't have
One benefit of making a purchase by credit card is that you don't need to pay for it right away. You have until the bill's due to pay it off without interest.
The problem is that it's very easy to use this as a justification for overspending. You know you can't afford that $500 jacket now, but you could put it on your credit card. That way, the bill won't be due for a few weeks, and by then, you'll have gotten a paycheck that can cover the purchase.
Even though this can work, it's not a habit you want to develop. You're still spending money you don't have. That can come back to bite you if your paycheck is delayed or other expenses come up that you have to pay instead.
5. Not using a credit card
To avoid credit card problems, some people simply avoid credit cards entirely. There are even financial experts who recommend this approach, but it's something we strongly disagree with.
There are all kinds of situations where you might need a good credit score -- when you apply for an apartment, get a mortgage for a home, or finance a car, to name but a few. And the most effective way to build your credit is by using a credit card.
Rewards credit cards can also earn you cash back or points on purchases. It's smart to take advantage of this opportunity to get something back on your regular spending.
6. Using the wrong credit card
Not all credit cards are created equal. If you're using the wrong credit card, you probably aren't maximizing the possible benefits.
There are plenty of ways people end up with the wrong card. Maybe you're paying for a card with an annual fee, but you don't use it enough to justify the cost. Or it could be the other way around, and you're sticking with a no-annual-fee card even though you could get more value by upgrading.
If you have good credit, review the best credit cards on occasion to see what kind of offers are available. You won't have as many options if your credit score is a work in progress, but you can still compare credit cards that are available to you and pick the one that offers the most value.
7. Wasting your credit card rewards
Imagine you have a stash of 50,000 hard-earned credit card points. You notice you can use them with Amazon, so you redeem all of them toward $300 in purchases. Then, you find out that you could've redeemed them for $500 in cash back and potentially even more in travel. It's a frustrating lesson in why you should be careful which redemption you choose.
As you earn credit card rewards, you should also learn how they work. That means investigating your redemption options and knowing which are the best deals. It's also crucial to check the expiration policy on those rewards.
Credit cards can be either a useful asset or a thorn in your side -- it all depends on how you use them. If you avoid the mistakes above, your credit cards will likely be a positive factor in your finances.
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