7 Credit Card Mistakes to Avoid
I like to think of myself as a pretty financially savvy person. I better be, anyway, since I write about personal finance and work with financial advisors for a living!
But being wise to finance fundamentals and best practices when it comes to money management is one thing. Actually taking action with your own situation means wrestling with something else entirely.
And that means making mistakes from time to time. While you can recover from financial missteps, it’s best to avoid them when possible. That’s especially true when we’re talking about credit card mistakes.
Making errors with your credit card usage can lead to fees and other charges. It can cause your credit score to take a hit, which costs you in tangible terms if you ever want to borrow money or finance a purchase. And in the worst-case scenarios, credit card mistakes can leave you in a very deep hole of debt that’s difficult to climb out of.
While small mistakes and slip-ups are inevitable, understand the biggest credit card mistakes to avoid and how to prevent them from happening in your life.
1. Not Reviewing Your Statements Each Month
Life is busy and the last thing I want to do after a long, stressful work week is to review every line item on my credit card statement. But this is a big mistake to avoid making.
Skipping over your statements and just blindly paying your bill can feel like “good enough.” You paid your balance, after all. You even did it on time!
But here’s the problem with just paying your bill without looking at all your transactions. It’s easy to miss errors and charges you didn’t make. You can also pay for services you no longer use for a long time if you don’t notice the fees hit your account each month.
This can cost you big in the long run. You want to catch fraudulent charges as quickly as possible so you won’t be responsible for paying them (and so you don’t use your money to pay for some bad guy’s bill!).
And if someone else makes a mistake, you don’t want it to become your mistake by letting it go. Your credit card comes with consumer protections, so you can dispute charges you don’t agree with or feel are inaccurate.
Take advantage of this card benefit! The only way to do it is to know exactly what charges appear on your statement. Review it every month before you pay your bill.
2. Neglecting to Use Your Card
You probably know carrying a balance and racking up interest on your credit card isn’t good for your finances. But going to extremes in the other direction can be a mistake, too.
If you neglect to use your card altogether, you miss opportunities to build and improve your credit score by developing a history of on time and in full payments. But your inactivity could also lead to your card issuer automatically closing your account, and that could deliver an even bigger blow to your score.
That’s because the age of your credit history matters when it comes to keeping a good score. Credit reporting agencies look at the average age of your accounts. When one account closes down, that impacts that average age of your entire file. (Closing your account also impacts your credit utilization ratio, since that's impacted by the total amount of credit available to you.)
And neglecting your card altogether leaves you open to fraud, just like failing to check your monthly statements does when you use your card.
If you have an open line of credit but don’t want to use it, check on the account periodically to ensure no fraudulent charges hit. You should also use the card every once in a while (and pay it off) to keep the card active.
3. Using Your Card for the Reward Points
Let’s cut to the chase here: spending money just for the sake of racking up rewards points is never worth it. You will spend far, far more trying to earn points to redeem than you would if you just paid cash for the things you want to obtain with points.
Points are usually worth pennies - sometimes a single penny - and you get the most bang for your buck when you can earn rewards during a credit card’s promotional period. You can earn lots of points for a set amount of spending when you first sign up for a card, for example, or you may be able to earn more when you refer someone else to open their own card.
But spending money you weren't planning on spending originally will only cost you more in the long run.
4. Using Your Card for Cash
The first time I traveled abroad, I wasn’t sure the best way to get cash in foreign currencies. I knew exchanging money at the airport was a ripoff, and my bank at the time didn’t offer some of the currency I needed.
I read that ATMs were probably the best deal for exchanging currencies and getting cash, but I wasn’t sure if my bank would charge me a big fee for doing so.
Then I remembered my credit card. Months before, I specifically got this credit card for travel because it didn’t charge foreign transaction fees. Then I remembered reading about the fact that I could use my credit card to withdraw cash at ATMs abroad, too.
I couldn’t remember the details, though, so I called the credit card company to ask more. And thank goodness I did.
While I could withdraw money from an ATM with my credit card, I didn’t realize this was considered a cash advance that came with a crazy-high interest rate that compounded daily from the moment I took out the cash.
This was a mistake I narrowly avoided. I had no idea how cash advances worked, the kinds of fees associated with them, and how interest rates worked differently on these transactions than on others.
You should avoid making this mistake, too. Cash advances with your credit card just aren’t worth the cost. Save up the money you need instead, or rely on an emergency savings fund to get you through tough times.
And instead of getting stuck with no cash and just a credit card when you need bills on hand, make a habit of carrying about $100 in cash on you just in case at all times. This was a hard habit for me to build, but I’m grateful I did.
Now I don’t need to rely on my credit card and I certainly don’t need to mess with the headache of cash advances. Neither do you!
5. Failing to Read the Fine Print
There may not be anything more monotonous than reading through the legalese on a credit card agreements. But failing to do so is a big mistake that’s easily avoided by taking 20 minutes to review the fine print.
Reading the fine print would have helped me better understand the consequences of cash advances, for one. It might help you get familiar with the fees, charges, and rates associated with your particular card.
Agreements and all the fine print also explain how rewards programs, perks, and benefits associated with your credit card work. Take the time to look through this information so you can use your card to your full advantage - and so you can avoid other mistakes like not knowing when your bill is due or how different transactions carry different interest rates.
6. Charging Up to the Limit
I consistently made this mistake with my first credit card and held my credit score back as a result. I didn’t realize that 30% of my credit score depended on my credit utilization ratio.
My first card came with a small $300 limit and between gas, groceries, and other essentials, I always bumped up close to that limit each month.
While I paid off my balances and never got into credit card debt, using almost all of my available credit meant my credit utilization ratio was constantly hovering around 90% - and the ideal ratio shouldn’t go above 30%.
That made it look like I couldn’t manage my money as well as someone who didn’t use as much of their available credit. And whether that’s true or not, that’s how credit scores are calculated.
FICO Credit Score Factors and Their Percentages
|FICO credit score factors||Percentage weight on credit score:||What it means:|
|Payment history||35%||Your track record when it comes to making (at least) the minimum payment by the due date.|
|Amounts owed||30%||How much of your borrowing potential is actually being used. Determined by dividing total debt by total credit limits.|
|Length of credit history||15%||The average age of your active credit lines. Longer histories tend to show responsibility with credit.|
|Credit mix||10%||The different types of active credit lines that you handle (e.g., mortgage, credit cards, students loans, etc.)|
|New credit||10%||The new lines of credit that you've requested. New credit applications tend to hurt you score temporarily.|
When I figured this out, I corrected my mistake by opening another credit card account. This one came with a higher limit, which bumped up my overall available credit.
Then I paid more attention to how much money I charged to each card every month. If I was at risk of using more than 30% of my available credit, I paid with my debit card instead.
7. Turning a Blind Eye
Ultimately, the biggest credit card mistakes occur when you ignore part of all of your financial situation. It’s easy to make errors when you don’t bother to learn more about money management and how to handle lines of credit.
Don’t keep yourself in the dark. Get involved and be proactive instead.
Review your statements each month and pay attention to your spending. Get curious, too. Ask questions about how your credit works and the best ways to use it to your advantage.
Keep learning and finding ways to improve how you use your credit and money as tools to create a better financial life.