Credit cards can offer many financial benefits and flexibility, but they can also come with great costs, if you’re not careful. Make sure you’re using your credit card wisely and avoiding these expensive mistakes.
1. Maxing it Out
One of the worst things you can do with your credit card is to max it out, or using up all of your line of credit. Doing so puts you at risk for fees and an increased interest rate if you exceed your limit. You should always keep an eye on how much credit you’re using and monitor your statements so that you can keep your balance at a healthy level. A good rule of thumb to go by is a balance of less than 30 percent of your available credit. For example, if you have a credit card with a $1,500 credit line, you should never have a balance of more than $450 on that card.
2. Carrying a Large Balance
Even if you have a very high amount of credit available, you may still want to keep your balance substantially lower than that 30 percent threshold. For example, if you have an $8,000 credit line, the rule would allow you to keep a balance of $2,400 or lower. However, if you cannot pay off that balance, or most of that balance, at the end of each month, then you should not have a balance that large. In order to avoid paying high interest rate fees, you should be able to pay off your credit card during each billing statement period. If you don’t, you will have to pay interest rate fees on your outstanding balance. That means if you have $2,400 on your credit card when a payment is due, and you only the make the minimum payment of $25, you will have to pay a fee on $2,375. If your interest rate is, for example, 12 percent, that means you will have to pay $285 in interest. Ideally, you should never carry a balance on your credit card. But if you do, try and keep it as low as possible.
3. Paying For College
Putting college tuition on your credit card is a huge mistake. The reason is simple: credit cards have higher borrowing costs than student loans. If you have to take out debt to pay for school, you should always check to see if you can get a federal student loan first. These have much lower interest rates than a credit card. You can usually get a federal loan to pay for undergraduate and graduate school. Some forms of education, such as continuing education or a certificate program, may not be eligible for a federal loan. In these cases, you should check to see what kind of private loan you can get. Even private loans usually have lower interest rates than credit cards. The only time you should pay for college with your credit card is if you have enough cash on hand to pay off your credit card debt at the end of the month, and you just want to build up points on your credit card.
4. Viewing Your Credit Line as Your Money
Having a credit card on which you can charge up to $3,000 doesn’t mean that you have $3,000 of your own money to spend. This is actually someone else’s money that you are paying to borrow. So don’t go using your $3,000 credit line like it’s money in the bank. It’s not yours, and it’s expensive to use.
5. Using it Without Reading the Fine Print
Always read your credit card terms and understand what you’re agreeing to when you apply for a card and start charging it. You should make sure you know when you have to pay your bill, the minimum amount you have to pay and what fees and penalties are associated with failing to meet these terms. Reading the fine print will help give you more control over your credit card costs.
6. Lending it to Friends
One of the worst things you can ever do with your credit card is to lend it to another person. If you do, it’s out of your hands and you can’t control what happens. Whatever expenditures made on that credit card have a direct impact on your credit profile, and yours alone. If it falls into the wrong hands and someone starts spending irresponsibly, your credit score could take a hit, which will have negative impacts on other aspects of your life, like the ability to take out a loan or a mortgage or even to rent an apartment. Always stay in control of your finances and your credit profile by keeping your credit card in your own wallet.
7. Allowing Your Points or Miles to Expire
Building up points and miles takes time. However, if you use your card responsibly and you earn up enough points, it can eventually pay off in the form of a free trip or a discounted hotel stay. Make sure you take advantage of your spending activity by knowing the terms of your rewards. Always redeem your points before they expire.
8. Making Late Payments
There is no excuse for making a late payment. In fact, even if you are very responsible, you should still sign up for automatic payments. Make sure the minimum payment gets made every month automatically, and then you can make an additional payment whenever you want. That way, you can ensure that you will never incur any late payment fees. It would be even better if you set up automatic payments for your entire credit card bill, but you need to make sure you have enough money in your bank account to make those payments so you don’t get hit with overdraft fees from your bank.
With the right discipline and spending habits you can end up reaping all the benefits that credit cards have to offer. These include the rewards programs, as well as fraud protection, car insurance, and product warranties that debit cards do not offer. Just be sure to avoid making these mistakes, and use your credit card responsibly.