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Credit cards are a convenient way to make purchases and pay them off over time. They can also allow you to earn rewards on your spending and build your credit. Unless they're managed carefully, however, credit cards can cost you extra money in interest and fees. Late payments and high card balances can lead to a damaged credit score, which could make it harder to access credit with favorable terms in the future.
Here are eight costly credit mistakes and how to avoid them, plus advice for getting the greatest possible benefit out of your credit card.
1. Making a Late Payment
One of the worst mistakes you can make with your credit card is neglecting to pay at least the minimum amount due every month. Missing a payment—or making less than the minimum payment—can result in late payment fees and a higher interest rate called a penalty APR.
Even worse than extra costs now, late payments can do lasting damage to your credit. Making just one 30-day-late payment is likely to decrease your score, and that impact can grow more severe if you continue to miss payments or default on the account. Late payments can stay on your credit report for up to seven years, affecting your credit the entire time they're there.
You can avoid the short- and long-term costs of missing a payment by always staying current with your bills and making on-time payments. Set up automatic payments and ensure you have adequate funds in your account when your due date rolls around.
2. Carrying a High Balance
It's a bad idea to rack up a high balance or max out your credit card. Spending more on your credit card than you can afford to pay down each month is a common entry point into a debt spiral because it can result in accumulating interest that makes it harder to pay back what you owe.
On top of that, using a large amount of your available credit can hurt your credit score and make it harder to get approved for the best terms on loans and credit cards. Lenders and credit scoring models tend to see a high credit utilization ratio, which is the size of your balance compared with your total available credit, as an indication that you may be a riskier borrower.
It's a good idea to keep your credit utilization below 30%, but the lower, the better. Keep your balance low by tracking your spending and only making credit purchases that you can afford to pay off.
3. Making Only the Minimum Payment
While paying at least the minimum on time each month will save you from late fees and damage to your payment history, it's not a good idea to only make minimum payments. Paying only the minimum can cause your balances to remain high and add months or years to your debt's repayment, plus a lot more money paid in interest. Avoid high interest and debt by paying down your balance each month.
To better plan out how to repay your credit card, use Experian's credit card payoff calculator:
Credit Card Payoff Calculator
†The information provided is for educational purposes only and should not be construed as financial advice. Experian cannot guarantee the accuracy of the results provided. Your lender may charge other fees which have not been factored in this calculation. These results, based on the information provided by you, represent an estimate and you should consult your own financial advisor regarding your particular needs.
Try the full Credit Card Payoff Calculator Opens a new window with more features.
4. Not Reviewing Your Credit Card Bill
Be sure to review your credit card's transaction history regularly, such as every week or every month, to check for any unrecognized activity. If you make a habit out of checking your billing statement, you'll be in a better position to quickly spot a charge you didn't make.
Seeing charges you don't recognize on your bill can be a sign of credit fraud or a billing error, so you should act quickly and report charges you didn't make to your credit card company. Most credit card issuers won't hold you liable for any unauthorized transactions if they're reported in a timely manner.
5. Overlooking Points and Rewards
If the credit card you use primarily for purchases doesn't earn rewards, you're missing out on the chance to get added value from your everyday spending. Rewards cards let you earn points, cash back or miles in the categories you spend the most on, such as travel, dining or online shopping.
When choosing a rewards card, be sure to consider the effect annual fees can have on its rewards potential. Some of the best rewards cards also have some of the highest annual fees.
Rewards cards with the most benefits are typically geared to applicants with good or excellent credit. If you're working with an average or low credit score, it may be in your favor to hold off on applying for a rewards card while building your score.
6. Borrowing With a Cash Advance
If you find yourself in a position where you need more cash than you have in your checking account, it could be tempting to tap into your credit card available credit with a cash advance. A cash advance allows you to borrow money from your line of credit at an ATM or with a check. It may seem like a good idea in a pinch, but it's an expensive way to borrow that's best to be avoided whenever possible.
Cash advances may come with higher interest rates and typically don't have a grace period, which means interest begins to accrue immediately. In addition, depending on your credit card's terms, you can also expect to pay a cash advance fee charged as a percent of the total amount you withdraw. A personal loan is typically a better option when you need to borrow.
7. Not Reading Your Cardholder Agreement
Your cardholder agreement outlines the key terms of your credit card, so it's essential to read through this document when you apply for or are approved for a credit card. Otherwise, you could miss important information on interest rates, including how to avoid triggering a penalty APR or what happens when your card's 0% introductory APR period ends, if applicable.
You'll also find information on credit card fees in your card agreement, including annual fees, late payment fees, balance transfer fees and foreign transaction fees.
8. Applying for Many Credit Cards at Once
Every time you apply for credit, a hard inquiry is typically added to your credit report. A hard inquiry can temporarily lower your credit score by a few points, but you don't have to sweat over an occasional inquiry. And with installment loans, such as mortgages, applications submitted within the same short period—15 to 45 days, depending on the credit scoring model—will only count as one inquiry.
This same treatment isn't extended to credit cards, however. Numerous credit card applications in a short period of time can have a compounding effect on your scores. As such, try not to apply for a new credit card more often than you need to.
You can avoid amassing inquiries and increase your chances of being approved for credit by checking which credit cards you prequalify for before applying. You can also use Experian CreditMatch™ to be paired with credit cards based on your credit profile.
The Bottom Line
You can avoid losing money to interest and fees or damaging your credit score by being well-versed on credit habits that work for you—and those that work against you. Paying down your balance, making on-time payments and knowing your card's terms are key.
In addition to sticking with good credit card habits, start tracking your credit score. Monitoring your credit score through Experian shows you how your credit history is impacting your score so you can tailor your credit habits to help you qualify for the best rates down the line.