Credit Card Mistakes to Avoid

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Credit cards can be a financial trap for many people. They are not always used properly, and some go deeply into debt using them. The basics of maxing them out or not making payments on time are two mistakes people make.

When used correctly, credit cards can be a valuable financial tool. But there are credit card mistakes that most people don’t even know they’re making. What mistakes are these, and how can you avoid them?

Using a Credit Card for Rewards

Incentive rewards like cashback can be very enticing when it comes to choosing a credit card. But once you have the card, the temptation is to overspend to rack up the points, which has led plenty of people down the debt path.

Most rewards cards have high interest rates. That’s how they finance the rewards. They’re banking on individuals carrying a balance, and the card companies can then charge a high interest rate.

If you pay off your credit card every month, then you’re a good candidate for a reward card. But for those revolvers who don’t pay it off, you end up paying more interest than you receive in rewards. And that doesn’t include the balance you accumulated.

Remember that many of these reward cards also charge an annual fee. Depending on how enticing the rewards are, the fee can be large. The average reward card fee is $95, but the high reward cards can run into the hundreds. Most non-reward fees are below $50 or free.

This almost forces you to spend to justify the expense.

Signing Up for the Wrong Rewards Credit Card

If you’re not a heavy revolver and want that rewards credit card, ensure you read the terms of agreement. Try to read it before you sign up.

If the points are rewarded for airfare and hotel, but you never travel, the rewards won’t be worth much to you.

On the other hand, if you do want travel points and the card rewards for everyday purchases, you’ll be out of luck.

Think about how you use your credit card. Do you use it for daily purchases or big vacations?

Some people use their credit cards thinking they'll receive the right points, but without checking before you sign up, it’s potluck.

Paying Medical Bills With Credit Card

Although medical bills may seem overwhelming, charging them to a credit card with double-digit interest may put you further in the hole.

First, review your medical bills to ensure accuracy. If everything seems in order, contact your healthcare provider’s accounting department to work out a payment schedule. Most are willing to do this.

Not Knowing or Understanding Fees

It’s time to revisit the terms of agreement, which contain all the rules regarding your credit card.

This is where you find the annual fee. You’ll also find the annual percentage rate (APR), which is the yearly interest rate at which purchases are charged.

There is also a balance transfer APR and a penalty APR. The penalty APR is the interest rate at which your credit card increases if you pay your balance late.

There are late-payment fees, foreign-transaction fees, and balance-transfer fees (separate from the balance-transfer APR).

Read the terms of agreement before you sign up for a credit card. It may not seem like such a great deal.

Not Examining Monthly Bill

Examine your credit card vigilantly every month. The first reason is fraud. With the prevalence of identity theft, you want to monitor all expenditures. If something looks off, call the credit card company immediately.

But another reason to check your bill is to catch mistakes. Credit card companies sometimes make billing mistakes.

If you find one call the customer service number or file a dispute online. You should follow up on this with a letter.

Although you must pay any undisputed charges, you don’t have to pay the interest or fees associated with the disputed charge while the credit card company reviews it.

The company must explain why the charge is valid or fix it on your bill.

Closing Credit Cards

There are a couple of reasons not to close a credit card. First, closing a credit card increases your credit utilization rate, which is the amount of credit you have versus the amount used.

If you close a card, you’ve lowered your credit amount, which raises the percentage of debt. The credit utilization rate is factored in when applying for other credit cards, auto loans or mortgages.

Another reason not to cancel a credit card is the loss of history. For example, if you have a credit card for five years and one for two, you have seven years of history. But if you cancel the five-year credit card, you’ve taken your history down to two years.

Understanding Credit Cards

The best way to understand credit cards is first to know your spending habits. You'll also want to think about your lifestyle.

If you carry balances on your card, the rewards will probably be wiped out by the interest you pay monthly.

Ensure the credit card provides rewards that you’ll use.

Finally, be vigilant and examine your monthly bill.

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