Credit cards are excellent tools to build your credit and earn rewards or cash back. However, it’s easy to fall into a trap of misusing credit cards and after you have racked up a large balance it becomes a very difficult hole to dig yourself out of. Learn about the biggest traps to avoid with credit cards so that you can be a successful cardholder and improve your credit.
1. Carrying A Balance
It’s easy to fall into thinking that you can spend a lot on credit cards and simply pay the minimum balance. You’ll get around to paying off the full balance one day, right? Wrong. You should only be spending what you can afford to pay off each month, barring any emergencies. Don’t put tuition payments or furnish your house with your credit card and then proceed to simply pay the minimum balance due each month. Your credit score will suffer due to the high credit utilization rate, which makes up 30% of your FICO credit score, and you will struggle to pay off the large amount of debt as interest accrues.
2. Late Payments
You have to pay the minimum balance each month so that your credit card issuer does not report you to the credit bureaus for missing payments. Your payment history is the biggest contributor to your FICO credit score so you need to take this seriously. If lenders see that you miss payments they will think that you are irresponsible with credit accounts and this will hurt your approval odds for the next line of credit you apply for. You should set up automatic payments for the minimum balance due each month and set a recurring calendar reminder a few days before the due date to see if you can pay off the full balance or most of it.
3. Transferring A Balance
If you have racked up credit card debt on one card and you see a card that has an introductory interest rate of 0% for the first 6 months or however long, it can seem very enticing to pay the balance transfer fee and transfer your debt from one card to another. This works for some people if they really decide to pay off that debt before the interest rate increases to the normal rate. If that’s you, then great. Many people will transfer their balance and continue increasing it each month until the introductory low interest rate ends and it skyrockets to the normal interest rate. This is irresponsible and will only come back to bite you. If you decide to transfer your balance, pay off the debt before the rate increases. Also be aware of credit card offers claiming a $0 balance transfer fee because these cards usually are covering up a high interest rate - they have to make money on you somehow.
4. Missed Rewards & Cash Back
One huge benefit of credit cards is that you can earn rewards or cash back depending on the terms of the card. If you have a credit card with no rewards then you’re missing out. If you use the card responsibly and pay off your balance in full each month then you’re basically getting free money each time you make a qualifying purchase. Learn when you should use your credit card vs debit card to make the most of rewards and protect yourself from fraud.
5. Cash Advance
A cash advance on a credit card is borrowing cash against your credit limit with the same or higher interest rate as your regular balance. We strongly caution cardholders to get a cash advance as you will pay a cash advance fee and you will owe interest on the amount. If you need cash, you should withdraw it from your debit account where you don’t pay an interest rate or cash advance fee. If you don’t have money in your debit account to withdraw from then take a step back and evaluate what you need this money for. Consider first cutting other costs and creating a monthly budget to protect yourself from entering into these situations.
6. Foreign Transaction Fees
Many credit cards have foreign transaction fees so they are not ideal to use when traveling abroad. If you have plans to travel internationally you should either use cash or use a credit card with no foreign transaction fees. These fees are usually 3% of each transaction made abroad so it can really add up if you use it for a trip. Prepare ahead of time and save yourself some money.
7. Closing Old Credit Cards
It may seem like a good idea to close your first credit card that you don’t use anymore. But, it’s not. Your length of credit history accounts for 25% of your FICO credit score so that means that you should avoid closing old credit accounts. You will have to check with the terms of your credit card because this may mean that you have to use the card every once and a while to prevent it from closing.
Credit cards, if used responsibly, can be a great way to build your credit history and increase your credit score. But keep in mind that there are many pitfalls to credit cards if you use them irresponsibly. Now that you’ve learned about the biggest credit card traps, make it a point to avoid falling into them and share this article with someone who you think would benefit from it.
If you don’t have a credit card yet and feel that you are ready to use it responsibly, learn how to pick the right credit card for you. Financial freedom begins with good habits!
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