When you are just starting to learn about personal finances, it’s easy to be afraid of making major credit card mistakes.
After all, for every one of your travel-hacking friends who constantly post photos in exotic locations on Instagram, you may also know another friend or family member who is drowning in credit card debt.
Credit cards aren’t inherently “good” or “bad.” Understand how credit cards work and you’ll be able to “adult” with them effectively.
In this article, you’ll learn how to avoid 15 of the most common credit card mistakes made by beginners so you can make sure credit cards are a tool – not a vice.
Carrying a balance on your credit card
It’s the primary rule of owning a credit card: Always pay your statement balance in full each month.
There’s a reason why this mantra is repeated over and over again. Carrying a balance on your credit cards will cost you hundreds, thousands, or perhaps even tens of thousands of dollars over your lifetime in interest charges – easily the most costly of the credit card mistakes you can make.
If you’re able to use credit cards responsibly, you’ll be able to enjoy their perks free of charge (or possibly for an annual fee). Interest charges on your credit card will quickly outweigh any benefits you’re enjoying by using the card, so once again…
Avoid carrying a balance if at all possible… and especially month after month!
Panicking about making a late payment
Earlier this year was my first time missing the due date on credit card payment (due to making the credit card mistake below on a new card). I was quickly stricken with sheer terror about how making the payment a day late would impact my credit score!
Fortunately, my research offered a relative sigh of relief. Late payments less than 30 days overdue are not reported to credit reporting agencies to be recorded on your credit report.
That being said, don’t consider this a hall pass to make a late payment. Banks will charge a fee for late payments – often $25 or more – that would certainly be better off spent paying off your balance (or on a nice brunch).
If you do happen to miss a payment due date, consider giving the card provider a call to ask forgiveness. Many credit card owners are able to request that a late fee is waived simply by asking, although you shouldn’t push your luck on this happening repeatedly.
Making manual payments each month
Manually making your credit card payments each month… Still 1000x better than missing your payments.
That being said, why not optimize your personal finances by automating your payments? It’s simple enough to set up automatic payments each month. Automation makes it easier to sustain good personal finance habits.
Even if you consider yourself to be well-organized, you’d be surprised how easy it is to miss a payment – especially when you don’t want your personal finances to be the ongoing focus of your life!
At the very least, set up the minimum payment to be automatically paid on your first payday after the credit card cycle closes.
If you do this, you’ll need still need to log in to pay off your balance each month, but you’ve set up a safeguard against those costly late fees. As soon as your credit card balances are under control – if they aren’t already – set up the automatic payments to cover the full balance each month.
Paying down your cards without a plan
It’s one of the most popular questions in the personal finance world on the topic of paying down debt:
Should you pay off the smallest balance first (snowball method) or the balance with the highest interest rate (avalanche method)?
From a mathematical perspective, the answer is clear: putting any extra money toward your credit card with the highest interest rate is the most efficient way to pay off your debt while minimizing the amount of interest paid.
If, however, you feel you’re most motivated by the satisfaction of paying off a card completely, it might be worth the psychological benefit of paying off a smaller credit card balance or two (assuming the interest rate on your higher balances aren’t significantly higher) to build some momentum along your debt payoff journey.
While paying down your debt this way isn’t as efficient, it will help simplify your financial situation and reduce the number of cards with a minimum payment each month.
Closing your oldest credit card
The age of your credit accounts is one of the major factors that contribute to your credit score:
- Payment history: 35%
- Credit utilization: 30%
- Length of credit history: 15%
- Recent credit inquiries: 10%
- Types of credit: 10%
Closing your oldest credit card will reduce the average age of your credit cards and negatively affect your credit score.
This is why you shouldn’t close your oldest credit card – your oldest credit card provides an anchor that establishes the beginning of a (hopefully positive) history of credit usage.
Closing your oldest credit card is just one specific scenario in part of a larger question that often translates into making credit card mistakes:
Should you ever close a credit card?
Closing credit cards with zero balance and no annual fee
To answer this question about closing credit cards, you should also ask yourself, “Can you keep the cards open without giving in to the temptation to spend?”
If you have a history of overspending, the answer might be yes – close your cards after paying off the balance. None of the benefits of owning a credit card will outweigh paying 27% interest on your balance. Additionally, there’s no need to continue paying an annual fee for a card that isn’t providing you enough benefits to justify its costs.
That being said, if you do feel like you can handle your credit cards responsibly, it’s wise to keep the accounts open. Having available credit without a balance will improve your credit score (by keeping your credit utilization rate low) and help establish your credit history.
Do yourself a favor and pick just 1-2 credit cards that you carry with you. These cards should have the best perks for your typical purchases and/or offer the lowest interest rates. Leave the rest of the cards at home – and whatever you do, don’t memorize the card number and expiration date!
Paying unnecessary annual fees
There are two major reasons to close a credit card:
- You are prone to buying what you can’t actually afford
- You are paying an annual fee higher than the benefits you receive for using the card
Many of the popular travel-hacking credit cards charge an annual fee – often $99, although the Chase Sapphire Reserve comes in at a whopping $450!
Why do travel hackers pay these annual fees?
- The benefits from the cards (free flights, hotel stays, etc.) outweigh the annual fee, AND/OR
- The annual fee is waived by calling and asking
Yes, just like late payments can be waived, annual fees are also up for negotiation. By calling in to speak with a credit card rep, you can get the fee waived or reduced, or at the very least, be offered additional benefits that will make the annual fee worth your while.
Waiting to apply for your first credit card
Are credit cards an entirely new thing for you?
If you don’t already have a credit card, then waiting any longer to apply for a card could very well be your first credit card mistake.
Responsible credit card use can be one of the simplest and easiest ways to start building your credit report and establishing a credit score.
By the time you’ve graduated from college (or within a couple years of finishing high school), you should have already opened your first credit card account and started developing good habits with credit.
If you wait much longer, you may find that your credit situation interferes with your ability to make major financial decisions such as purchasing a vehicle or buying your first house.
It can take years to establish a healthy credit situation – if you have a steady source of income and practice sticking with a budget, start now!
You’ll most likely start with a small credit limit (my first card was $500), which will minimize your risks when used responsibly. To start building credit, try moving a couple of your online subscriptions (Netflix, Hulu, Spotify, etc.) to the credit card and setting up automatic payments each month.
Signing up for a mailed credit card offer
When it comes to credit cards, it may feel like there are even more options than stars in a clear night sky. Do you want a credit card that offers a low-interest rate? Lots of airline points? No annual fee?
With so many options available, one of the biggest credit mistakes you can make is to sign up for one of the credit card offers you receive in the mail – at least without doing your own research first.
There’s a reason why credit card companies spend time and money to mail you an offer letting you know that you’ve been “pre-approved” for their card… Those credit cards are highly profitable!
If you’re stubborn like me, you’ll want to make sure you sign up for the credit card that best meets your needs – whether it’s for travel-hacking, a balance transfer, or building your credit. Do yourself a favor and use a site like Nerd Wallet to find the best credit card for you.
Pro tip: Opt out of prescreened offers
Everybody loves to receive a good old-fashioned letter or package in the mail, right?
On the other hand, nothing is more frustrating than opening your mailbox to a handful of circular ads and unsolicited credit card offers. We don’t have the answer on those grocery store mailers, but you can quickly opt out of prescreened credit card offers through OptOutPrescreen.com.
In just a couple minutes, you can submit your request to the major credit reporting agencies (the same companies behind your credit report) to be removed from the offer lists for five years if requested online – or permanently, if you mail in the request form!
Refusing to increase your credit limits
“With great power comes great responsibility,” right?
Your credit limits can be your best sidekick or worst nemesis depending on your relationship with credit cards.
If you have difficulty with keeping your spending in check, or if you’re regularly carrying a large balance on your credit cards, then it might be safest to keep your credit limits where they’re at.
After you’ve mastered the basics of using credit cards – paying off your balances in full each month – then it’s time to request a credit limit increase on each of your cards.
“Why should I increase my credit limits if I’m not using the cards?” you might ask.
It all comes down to your credit utilization ratio. This ratio is your total credit card balance divided by your total credit card limits and is one of the most important factors used when calculating your credit score.
If you want the highest credit score possible (and let’s face it, what money nerd doesn’t?), then you’ll want to lower your credit utilization ratio. To do this, you can either lower your credit card balances (which is the top priority) or increase your credit limits.
Paying down your balances can take time… to increase your credit limits, all you typically have to do is ask!
Finding yourself perpetually stuck on 0% APR cards
In one of my first guest posts, I shared how transferring a credit card balance to a 0% APR credit card can be an “easy win” for saving hundreds of dollars in credit card interest each month.
A couple other bloggers, Angela and Michelle, shared important words of caution: relying on 0% interest credit cards to manage your debt can enable bad spending habits and prevent you from getting the situation under control.
That doesn’t mean you shouldn’t consider using one of these zero-percent credit cards to reduce the amount of interest paid on your debt. Just be sure that you’re addressing the core issue that led to your credit card debt in the first place: often the lack of a budget or emergency fund.
Failing to pay off your 0% promotional APR card in time
On this same topic, failing to pay off your 0% APR credit card before the promotional period ends can quickly become one of your most costly credit card mistakes.
A 0% APR credit card doesn’t provide unlimited access to a pipeline of free money. These credit cards are only zero-interest for a specific promotional period – usually somewhere between 12 and 21 months.
What many people don’t realize is that you need to pay all of your credit card balance off by the end of this promotional period. If you fail to pay the balance in full by the end of the promo period, you may be forced to pay any interest that was originally accrued during that introductory period.
There may be other rules you need to be aware of: making a late payment or missing a payment altogether may trigger an early end to the 0% introductory APR rate.
It’s important to carefully review the cardholder agreement to understand the specific terms for your credit card – and as mentioned above – set a goal to pay your balances in full and avoid the vicious cycle of 0% APR cards altogether!
Failing to catch credit card fraud
Earlier this year, I found myself victim to $529 in credit card fraud. I could have very easily missed this fraudulent transaction (a fraudster pretending to be associated with Boston Comcast) had I not reviewed by card transactions before the automatic balance was paid.
Yes, it’s important that you automate as much of your credit card usage as possible to avoid missing payments or racking up interest charges. That being said, it’s also a mistake to have your credit cards be completely out-of-sight and out-of-mind.
Want to avoid falling victim to credit card fraud? Try setting up automatic notifications – either through email or banking apps – to let you know whenever a purchase is completed.
It takes just a moment to dismiss each notification, but you can enjoy a degree of security knowing that you review each transaction as it’s made.
Missing out on valuable credit card benefits
When it comes to credit card rewards, the first benefits that come to mind are probably airline travel miles or “cash back” on your purchases.
If you think these are the only benefits offered by using your credit cards, you are most certainly mistaken!
While a free round-trip ticket to Hawaii or New York City sure sounds nice, most credit cards also offer additional benefits, such as:
- Extended warranties on purchases
- Car rental insurance
- Trip cancellation insurance
- Airport and hotel concierge services
- Exclusive access to special events
- And more
These kinds of benefits just simply aren’t offered on purchases made with cash or a checking account.
Credit card companies want you to remain a loyal customer – after all, they make tons of money from their “normal,” irresponsible user – so be sure to take advantage of all the bells and whistles offered to you.
Missing out on points from planned large purchases
If you’re taking control of your personal finances, you’ve committed to budgeting for major purchases.
Rather than paying for your next cell phone, laptop, or kitchen appliance with an extended payment plan, you’ve decided to save up in advance and avoid paying interest on your purchase.
Kudos to you… But surprise! You may still be making a mistake if you don’t use a credit card to make your purchase.
After all, if you earn 2% cash back on all of your credit card purchases, you may get back $25 or more on your next laptop purchase!
You won’t earn this “free” cash back if you decide to purchase the laptop using the cash you’ve saved in your checking account. The secret is:
- Saving up for your purchase in advance
- Using a credit card to earn the airline points or cash back
- IMMEDIATELY paying off the purchase – don’t even wait for your statement to close
This gives you the best of both worlds: access to credit card rewards without the risk of high-interest payments and ongoing debt.
Just remember: credit cards are a tool that must be used responsibly. They aren’t an alternative to developing other sound financial habits, such as sticking to a budget or saving up money before making an expensive purchase.
While the rewards and conveniences of credit cards can be appealing to everyone, you want to make sure you aren’t paying exorbitant amounts of interest each month (or really any interest at all!) to enjoy these benefits.
By avoiding these 15 common credit card mistakes, you will be able to pay down your debt, minimize your interest payments, boost your credit score, and enjoy many of the fun perks that credit cards can offer.
What’s the most important lesson you’ve learned about using credit cards (whether it’s been a benefit you’ve enjoyed or a mistake you’ve made)?