America’s love affair with credit cards seems to be going sour. At the very least, the honeymoon is officially over. In 2012, twice as many consumers between the ages of 18 and 35 reported not having a credit card than in 2007. Moreover, those who do have credit cards are now less likely to use them online or to register for rewards programs.
Although less credit is not a bad thing, when you consider the average credit card debt is $15,270, giving up credit cards altogether is not smart.
When used responsibly credit cards are useful and empowering financial tool. They help you build up your credit and provide valuable benefits, such as an influential intermediary to assist you in disputes and an extra layer of protection against fraudsters. Not to mention rewards programs, which allow savvy users to save hundreds and even thousands of dollars a year in travel points, cash rebates and other rewards.
Millions of Americans, around 35 percent of credit card holders, have a healthy relationship with their credit cards and pay off their balance in full every month. It is the other side of the story, the $857 billion in credit card debt and the 39 percent of Americans who carry a balance on their credit cards, that give credit cards a bad rap.
Sometimes credit card debt is unavoidable. Unexpected medical expenses and unemployment can throw off even the most financially responsible of consumers. Other times we only have ourselves to blame. Here are 15 mistakes you’re making with credit cards and some tips on how to stop.
1. Paying Your Bills Late
Needless to say, credit card companies love late fees. Although the Credit Card Act of 2009 did help things by capping late fees at $25 for first-time offenders, habitual offenders are soon hit with a $35 fee and penalized with a higher APR to boot.
In 2012, 28 percent of low- and middle-income households reported paying late fees on their credit card. The scariest thing about that figure is that it represents a huge improvement. In 2008, 50 percent of credit card holders reported paying late fees.
2. Messing Up Balance Transfers
Done correctly balance transfers makes a lot of sense. Moving debt from a high-interest-rate credit card to one with a 0% introductory rate can save hundreds or even thousands of dollars in interest payments. The problem is few cards offer a truly free transfer. Many include hidden transfer fees, which are not capped, and can range from 3 percent of 5 percent of the balance transferred. Even if the introductory is a good deal, many miscalculate how quickly they will pay off the debt and find themselves paying an even higher rate once the grace periods ends.
3. Making Minimum Payments
It’s easy to get into the habit of only making minimum payments on your credit card balance and forget the real cost of your credit card purchases. Let’s say you buy a top of the range TV and home theater system for $5,000 and put it on your credit card. Assuming your credit card has an APR of 15 percent (average rate in 2013) and you only make minimum payments, you will take 24 years to pay for it. During that time you will rack up $7,246 in interest charges, which brings the total price of the TV system to $12,246.
4. Maxing Out Your Credit
It’s not just the usurious interest rates credit cards charge you have to worry about. Maxing out your credit cards also hurts your credit score, even if you never miss a payment. About 30 percent of your credit score is based on your credit utilization ratio, which is calculated by dividing your available credit by how much debt you have. A low credit score can increase your auto insurance premiums, disqualify you from low interest rates and make it harder to find a job or lease an apartment
5. Forgetting About Annual Fees
Premium cards, the ones with the best benefits and reward programs, usually charge an annual fee of around $75. Most will waive the first year, but these annual fees can quickly add up when you have a few credit cards. Make sure each credit card is holding its weight and the benefits you receive are worth the annual fee.
6. Getting Too Many Cards
One of the most common credit card mistakes is having too many credit cards. For some people the available credit is just too much of a temptation to resist. Even if you have the self-control to keep your balances at zero and pay your credit cards in full every month, having too many cards could lower your credit score. At the very least, it makes lenders nervous, particularly if the credit available is not proportional to your income. Creditors may wonder what would happen if you went on a spending spree and maxed out all your accounts at once.
Suddenly trying out credit card churning is NOT a good idea.
7. Choosing a Card Without Shopping Around For The Best Rates
Credit card interest rates range from 7% to 36%, so it pays to shop around. Granted, to qualify for anything around 10% you will need excellent credit. However, even a few interest points can make a huge difference. Imagine you have a credit card balance of $5,000 and you made fixed payments of $150 a month. If your interest rate were 15% instead of 18%, you would save $475 in interest and pay the debt in 44 instead of 47 months.
8. Not Keeping Track of Purchases
Paying for things is never fun, but some methods of payment hurt more than others. When you buy something with plastic you are not limited by the money in your wallet. There’s a break between when you buy things and when you have to pay for them. When you pay with cash, however, the pain is harsher because the link between the purchase and the cost are closely linked. This explains why it’s so easy to fall into debt when using credit cards. It does not feel like you’re spending real money.
Use a notebook or an app to keep track of your purchases. The act of keeping a separate record of your purchases will help you tabs on your spending habits and avoid nasty surprises when you get your monthly statement.
9. Paying Your Credit Card Balance Once A Month
Even if you pay your credit card balance in full when you receive your monthly statement, your credit card company may be reporting your monthly balance as debt. This reduces your credit utilization ratio, a major factor in determining your credit score. You can avoid this by making several payments a month, particularly after major purchases. A good rule of thumb is to use less than 30% (10% is ideal) of your available credit.
10. Paying Foreign Transaction Fees
Falling for foreign transaction fees is a classic mistake for first-time travelers. These fees can run as high as 3% of every transaction outside the United States. If you spend $3,000 on your overseas vacation, about the average for a family of two, you’re looking at $90 in fees. Avoid this by choosing a credit card that doesn’t charge foreign transaction fees, which includes most premium travel cards.
11. Using Credit Cards for Cash Advances
Unless we are talking about a life and death emergency, never use your credit card to get a cash advance. Not only will you be hit with an upfront fee for the service, a $50 fee is typical, the interest rate is higher, around 5% more, and you will start incurring interest immediately.
12. Spending To Earn Miles
Savvy users can make hundreds of dollars a year by registering for credit card reward programs and using plastic to pay for stuff. Some of these programs are so well designed it is easy to get sucked into them and feel you are actually saving money by using your credit card. Regardless of how generous the point system of your card may seem, never spend money just for the points. Even the best cards don’t offer more than 5 cents on the dollar in miles or points. That is just 5 cents in the dollar you spend, hardly a sustainable return on investment, and most cards are not nearly as generous.
13. Lending Someone Your Credit Card
Credit cards are like spouses, personal and non-transferable. It doesn’t matter how much you trust your family or friends, do not lend them your credit card. It is preferable to give them a loan or to buy things for them. Once your friends have your credit card, you have no control over what they buy and you, not them, will be left holding the baby, if they fail to repay their debts.
Before getting married, ask your spouse-to-be these 6 Credit Card Questions.
14. Allowing Your Credit To Get Charged-Off
If you don’t pay your credit card bills for six months, your credit card company can charge-off your account. Don’t be misled by the ill-advised name. A charge-off means your account has been cancelled and you can no longer use your credit card, it doesn’t mean your debt has been cancelled.
Charge-offs are toxic for your credit score and remain on your credit report for seven years: the same as a Chapter 13 bankruptcy.
15. Closing A Credit Card With a Balance
If you are working hard to reduce your credit card debt, it may seem like a good idea to close your credit account while you are paying off your balance. Although this drastic move will eliminate the opportunity of increasing your credit card debt, it is a terrible idea from a credit score perspective. When you close an account with a balance, it looks to creditors as if you have maxed out your account. Around 30% of your credit score is based on your credit utilization ratio: your available credit divided by your overall debt balance.
Andrew is the managing editor for SuperMoney and a certified personal finance counselor. He loves to geek out on financial data and translate it into actionable insights everyone can understand. His work is often cited by major publications and institutions, such as Forbes, U.S. News, Fox Business, SFGate, Realtor, Deloitte, and Business Insider.