There’s no question but that credit cards can be very useful. For one thing, they eliminate the need to carry a big wad of cash when you go shopping – which could be lost or stolen.
Most if not all credit cards will protect you from identity theft or if your card is lost or stolen. Many of them limit your liability to $50 and will even waive this if your card was lost or stolen or you found suspicious activity on your statement and reported it immediately
Today’s credit cards almost always come with some type of rewards. Depending on your card you could earn anywhere from 2X to 5x cash back just by using it to pay for things you’d use it for anyway. Or you could choose a card that pays off in airline miles and eventually fly free.
Credit cards can be a great way to track your spending if you’re on a budget. Just put everything possible on your cards and your monthly statements will show you exactly how much you spent and on what.
If you use your credit cards wisely your credit score will improve. The biggest component of your credit score (35%) is based on your credit history or how well you’ve handled credit in the past. Pay your credit card bills at the end of every month and your credit score will definitely improve.
Credit cards can be a real boon when you’re traveling. Most include emergency assistance and even travel insurance. Renting a car? You should be able to forgo the insurance you’ll be offered because your credit card will probably cover it.
But as helpful as credit cards can be they can also turn into your worst enemy – if you make any of these five costly credit card mistakes.
Carrying a balance forward
As noted above, it’s very important that you pay off your balance each month and not carry any balances forward. As an example of what this can mean suppose you owned $5000 on a credit card at 15% and paid just $150 a month. In this case, it would take you 44 months to get rid of that debt. A balance of just $1000 at 17% can even grow faster than you might ever imagine.
Missed or late payments
Just about the costliest of the credit card mistakes you can make is to be late or miss a payment. According to CreditCards.com, 1 out of 20 Americans are late on their payments.
When you do this, your credit card issuer will charge you a late fee, which can be anywhere from $25 to $35. But that’s the least of your problems. Make a payment late and you could see your card’s interest rate increase. Penalty interest rates for late payments can go as high as 29.99%. That would be a huge financial drain. When you are more than 30 days late your credit card issuer will report this to the three credit bureaus (TransUnion, Equifax and Experian). When you go to get an auto loan, a mortgage or some other type of credit your potential lender will see this late payment. That will make it more difficult for you to get the loan and if you are able to get one it will have a higher interest rate. That late payment will stay in your credit report for seven years. And, of course, a late payment can also cause a drop in your credit score.
There is a way to get a late credit card waived as explained in this video, which also offers some good advice about using and paying off credit cards.
Paying just the required minimum
Your credit card bills always have a minimum payment, which is what you must pay in order to avoid a late fee. But if you do this you are making a big mistake. According to an article published on BusinessInsider.com, this is a costly mistake. With the average credit card interest rate at 15%, you are bound to waste a lot of money. As you have read, you’ll end up paying a huge amount of interest over the life of the debt when you make just the minimum payment each month. Here’s another example of this. If you owe $3000 on a credit card with an interest rate of 18% and make just the minimum payment of $75 a month it would take you 222 months or more than 18 years to repay that debt – if you never made another charge.
While you might think it would be a good move to close credit cards you’re not using this can actually damage your credit score. In fact, 15% of your credit score is based on your credit history or how long you’ve had credit. If you have had a credit card for 15 years and close it because you’re now using one that you’ve had for less than a year your credit history will drop from 15 years to less than a year.
A second important component of your credit score is your debt to credit ratio. This is how much credit you have available versus the amount you’ve used. Let’s say you have $10,000 in total credit available and have used $3,000 of it. In this case, your debt to credit ratio would be 30%, which many experts feel would be okay. However, if your ratio were higher than 35% this would have a negative effect on your credit score.
Getting cash advances
If you find yourself short of cash then taking out a cash advance would seem very tempting. But don’t do it. These advances are not much better than payday loans. First, there will be a fee ranging from 2% to 4% for just taking the advance. However, that’s not the worst part. Your credit card issuer will likely charge you a higher interest rate on this money than on the purchases you make. Plus, that interest will begin accruing immediately. With credit card purchases there is a grace period but this is not true of a cash advance.
Even worse, you may not be allowed to repay that cash advance until you have paid off your traditional credit card debt. This means it would take you longer to pay off your debt because of that cash advance with its higher interest rate.