At times, credit cards are a miracle, providing a simple way out of a tough jam. But just as credit cards make it easy to spend, they make it easy to overspend. On top of that, using credit cards can come with a price — annual fees or interest on balances that aren’t paid off each month.
In short, they can be beneficial if used wisely, or they can wreak havoc on your finances and your credit if handled irresponsibly.
If you’re in the market for a credit card, first be sure you are choosing one that offers what you are looking for and charges low annual fees or, better yet, no fees. The Money Talks News credit card search tool enables you to filter search results based on credit card features like fees and rewards.
Then, know the 10 most common credit mistakes that can cause long-term damage to your financial standing and your access to loans when you most need them — and how to avoid making them.
1. Ignoring your credit reports
When was the last time you got a copy of your credit report and took the time to review it?
It’s easy to assume that your report is stellar now if it was stellar the last time you checked it. However, all it takes is one bad move on your part — or that of a fraudster who has stolen your identity — to lower your credit score.
Your credit report also may contain errors. Common mistakes on credit reports include errors in a consumer’s identity, incorrect reporting of an account’s status and mistakes in data management, according to the Consumer Financial Protection Bureau. A few examples:
- You might find someone else’s credit information in your report.
- Your closed account may be reported as open, or vice versa.
- Errors you thought had been corrected may reappear on your credit report.
Because credit scores are generally based on the information in credit reports, having mistakes in your credit reports can cost you money — from higher interest rates, smaller lines of credit or credit denied — if they make you look to lenders like a worse credit risk than you are.
The three national credit reporting bureaus — the companies that maintain your credit reports — are Equifax, Experian and TransUnion. By federal law, each bureau must provide you a free copy of your credit report once a year. But you must request it, which you can do at AnnualCreditReport.com.
2. Taking cash advances
A cash advance on your credit card is actually a short-term loan — an expensive one. Unlike when you withdraw cash from your bank account via debit card, a cash advance via credit card generally costs you a steep cash-advance fee as well as a steep interest rate. In addition, interest charges start accumulating immediately, usually from the day you take out the loan.
Don’t use a cash advance if you can help it. If you must, pay it off as quickly as possible because the costs keep multiplying until you do. Or explore other types of loans that aren’t as expensive.
3. Paying bills late
Picture this: You’ve been struggling to make ends meet. Instead of calling your creditors to see if any payment arrangements are available, you ignore the accounts. A few months go by, and you receive an alert from a credit score monitoring service. The news: Your credit score has plummeted.
Unfortunately, it takes just one late payment, as little as just 30 days late in some cases, to tank your credit by as much as 110 points. You’ll also pay a late fee. Your card company also might raise your interest rate if you’re late repeatedly.
4. Exceeding your credit limit
If you reach your card’s credit limit, expect merchants to reject your credit card. If you go over your limit, expect a hit to your credit score. That’s because your credit utilization ratio — meaning how much of your available credit you are using — accounts for 30 percent of your FICO credit score.
But exceeding your credit limit can cost you even more if you authorize your credit card company to approve over-limit charges, the Consumer Financial Protection Bureau says:
“If you have agreed to permit over-limit charges, you generally can be charged a fee of up to $25 the first time you exceed your credit limit and a fee of up to $35 if you are over your limit a second time within six months.”
5. Applying for too many cards
Applying for a credit card generally results in the lender making what’s known as a “hard” inquiry into your credit. Hard inquiries are noted on your credit reports, and having too many on your credit reports can lower your credit score.
Additionally, filing too many applications for credit cards signals desperation to lenders.
6. Responding to offers in your mailbox
It may be hard to pass up bonus points, miles or cash back offered to new customers of rewards credit cards. But understand this: Preapproved offers don’t guarantee that you’ll be approved. Think it over. You may not need that card. If you rarely leave town, for example, what good is a frequent-flier card?
7. Abruptly closing accounts
Closing a credit card account, even if you’re doing so because it’s no longer useful to you, could negatively affect your credit score. That’s because closing an account affects your credit utilization ratio, which, again, accounts for 30 percent of your FICO score.
Additionally, closing an account doesn’t make it disappear. You’re still liable for any outstanding balance, and closed accounts can remain on your credit reports for years. Exactly how long a closed account remains on your reports depend on the payment history of the account, according to Equifax.
8. Ignoring statements
Like your credit report, your bank and credit card statements may have mistakes, whether from human error or fraud. But if you don’t open and read those statements, you’ll never spot the problems.
It’s a good practice to examine your account activity weekly to catch any problems early.
9. Applying based solely on a promotional offer
It seems like every time I’m in a department store, the clerk at the register squeezes in a sales pitch about some irresistible store credit card offer. I politely decline, but I’m thinking, “Receiving a measly 15 percent off my purchase does not make up for all of the high interest and fees that come with these cards.” In other words, the costs outweigh the benefits.
I’m not suggesting that you refrain from signing up for a card that will actually be of major benefit to your family, such as through travel perks or cash back. Just be sure that the annual fee won’t swallow up all the perks. And if you carry a balance on a rewards card, the higher interest rates these cards generally have will nullify the benefits.
10. Failing to read the fine print
When you apply for a credit card, you are agreeing to take full responsibility for any legitimate charges made with the card. So you can’t afford to ignore the disclosures.
Fortunately, even if you make a few mistakes along the way, credit can always be repaired over time. (Check out our credit restoration page for help with that.) But it’s easier to avoid these 10 credit card sins.
What lessons have you learned using credit cards? Share with us in comments below or on our Facebook page.
Marilyn Lewis and Kari Huus contributed to this post.