Credit cards are convenient – and many offer rewards on purchases. But if you don’t use credit responsibly, you can quickly rack up debt and decimate your credit score in the process. Here’s a look at eight potential pitfalls to avoid.
1. Falling for marketing hype. When choosing a credit card, it’s easy to get excited about a sign-up bonus or a card that contains the logo for your favorite sports team without thinking about how the credit card actually fits your spending habits. Is it accepted at the retailers you frequent? Does it have an annual fee? What’s the APR? These details aren’t as exciting as snazzy bonuses or logos, but they’re crucial to consider.
If you’ve had credit issues in the past, a pre-approval offer might be tempting. But those pre-approvals are often a marketing gimmick. You might meet some kind of criteria set by the card issuer, but pre-approval offers are not a guarantee you’ll actually qualify for the card or that it’s the right card for you. Think about how you plan to use the credit card (Travel? Everyday expenses? Emergencies only?) and research your options to find the card that best fits your needs.
2. Skipping the fine print. Ignoring the fine print before or after you apply for a credit card can get you into trouble. People often skip the fine print and don’t understand the fees that are involved.
3. Making only the minimum payment. Just because you can afford the minimum payment doesn’t mean you can afford all your credit card purchases. Credit card companies are some of the best marketing people around … when you get your bill, the first number on your bill is the minimum payment. Carrying a balance on a rewards credit card typically means even higher interest rates than regular credit cards.
4. Taking a cash advance. Cash advances and other cash-like transactions can start running up interest from the date of the transaction. Often, these may be subject to different interest rates than regular purchases. There’s a temptation to use a credit card in an ATM machine or use those horribly obnoxious convenience things called cheques. Both can have extra fees attached.
5. Ignoring statements and other mail. Sometimes there could be charges that are technically legal but aren’t always authorized . These charges can include payments for a gym membership you thought you canceled or ringtones you didn’t know your cellphone carrier had tacked onto your bill. Review your credit card statements regularly to avoid these extra charges, and try to resolve the issue with the retailer or, if that doesn’t work, dispute the charges.
6. Maxing out your cards. Using all your available credit not only costs you money, it will lower your credit score because credit card issuers consider you a higher risk if your credit utilization ratio – the amount you’ve charged versus your total available credit – is above 50 percent. As a result, they may raise your interest rate, or they may try to reduce your available credit to rein in your spending.
7. Missing your due date. A credit card’s grace period is the time between the end of a billing cycle and your payment due date. Miss the due date, and you may get charged interest and damage your credit score. Try automating your credit card payments so you won’t get foiled by a lost cheque or forgotten payment.
8. Chasing points or miles. Credit card rewards can be addictive and cause some people to buy things they don’t need simply to get the rewards. The key to the rewards card is to use it to purchase things that you already need to buy.
Studies show that consumers spend more when paying with credit versus cash, and rewards card users spend even more than those with a regular card. Rewards cards are designed to get you to spend more, and so they can be very enticing.
To Your Wealth