Remember when you got your first credit card? It was so easy to use! With that new credit limit, suddenly the mall seemed even more exciting. Every store was full of potential purchases, all within reach with a single swipe.What (inevitably) came later, though, was not so fun.
We’re talking about your credit card bill. And the interest. And (if we’re being honest) the inevitable late fee.
In the last year, the amount of consumer debt has dipped slightly for Americans, according to a report from Lending Tree in May. All in all, consumer debt is expected to reach $4 trillion by the end of the year. (That number includes non-mortgage debts such as credit cards, personal loans, auto loans, and student loans.) The amount of revolving credit Americans have (i.e., credit cards), also fell by $8.1 billion in March, marking the second consecutive month with a decline.
While the balances on our credit cards might be slowly going down in the aggregate, there’s still room for improvement. (Especially when your card balance totals more than a year of college tuition!) Heck, we’re going to go out on a limb here and guess there’s many of us still making credit card mistakes like the ones we made when we first got that shiny new card.
That’s why we reached out and asked some financial experts to share what credit mistakes we commonly make—and how we can avoid them. Read on for what they had to say about bringing down your balance, improving your credit score and more.
Common credit card mistakes we can all avoid…
Not checking your statement regularly for irregularities
“We’ve seen many users struggle with credit card debt and overdrawn checking account balances. Among the credit card mistakes many people make are:
We’ve found many cases in which credit cards that were on autopay were being charged late fees and trailing interests, because of intentional process changes or unintentional mistakes on the bank’s side. By the time the customer realizes, they will have experienced a credit score hit. Yes,
this really happens more frequently than people think.
The solution? Schedule a routine check up of your statements, or sign up for personal finance platforms that you can check regularly for an overall health check of your account.”
—Nami Baral Founder & CEO, Harvest Platform
Not ~actually~ building up a rainy day fund
“[One mistake is] treating your credit card like an emergency fund: One of the consequences of having zero emergency savings is that when an emergency happens, you have to turn to your credit card to bail you out. That’s why it’s important to build up at least one month’s worth of take-home pay in a rainy day fund before you even start aggressively tackling your credit card debt. Once you hit that mark, you should continue to build up your emergency savings to about six months’ worth of expenses so you’ll have funds ready to dip into instead of turning to a credit card.
[Another mistake is] paying off too much too soon: While it may seem counterintuitive, you could wind up hurting yourself and your finances by throwing too much toward your balances — if you don’t leave yourself enough cash for other necessary expenses. Make sure that your debt payments are at a level that you can reasonably afford and that leaves you with enough to cover your other expenses and savings contributions.”
—Alexa von Tobel, CEO and founder of LearnVest
Not weighing the pros and cons of a store credit card
“Getting a store credit card can be a really big mistake. With these cards, the choice is pretty simple: If you carry a balance, you shouldn’t get a store credit card. Yes, those discounts and perks can be enticing, but the interest rates are just too high. After all, it doesn’t make sense to pay 25% interest to get a 20% discount.
If you do get a credit card, it’s incredibly important that you understand what you’re getting into. For example, many cards come with offers of 0% interest for a year or more. However, most of those offers come with a surprise in the fine print. It’s called deferred interest. What it means is that if you don’t pay the full balance off in the 0% window, you will be charged interest on what you bought, going all the way back to the original purchase date. That can be a really unpleasant surprise.
—Matt Schulz, Chief Industry Analyst, CompareCards.com, Austin, TX
Not setting up payments to cover the full balance
“One of the most common and easily addressed mistake credit card users make is only paying the minimum on their monthly bill. Whatever amount is left over from month-to-month continues to build, resulting in more debt, and thus a larger amount of interest building up over time. The solution? Credit card users should set up their auto-pay to cover their entire monthly bill, remaining conscious of their overall monthly spend. This allows the consumer to reap the benefits of building good credit by demonstrating their regular ability to pay, while not accruing larger amounts of debt.”
—Katie Wonders, accounting research lead, Clutch.co, Washington, D.C.
Not understanding the effects of canceling a card
“Canceling a credit card on which you’ve developing a positive history. In zealousness to get rid of credit card debt, or coming across a new card with great rewards attached to it, some people cancel accounts. However, the longer you hold a card, the more valuable it is in your credit score determination. Store a card away – or even freeze it – to avoid using it, but think very carefully before actually closing the account.”
—Sean Fox, co-president of Freedom Debt Relief in San Mateo, Calif.
Not understanding the effects of a charge-off
“Know the credit cards terms: One dangerous mistake is treating all your credit cards the same. Avoid credit card fees such as late payment, interest rates that increase your debt, cash-advance fees etc. by staying up to date with your credit card terms. Never allow a charge-off to take place: A charge-off could stay on your credit report for up to 7 years, and affect your ability to qualify for loans and credit cards in the future. Avoid this by setting up reminders and/or auto payments, to make sure you never miss the due date.”
—Adam Johnson, credit specialist, ScoreShuttle, San Diego, Calif.
Not understanding the impact of a low credit limit
“Having a low credit limit. Some consumers do not like credit, so they apply for one $5,000 limit card and use it exclusively. This means that one substantial purchase can use up 50 percent of their credit. This has a negative impact on credit scores and can leave a consumer vulnerable if an unexpected emergency arises. * It is best to have two cards; one for regular use and one for emergencies. No card should have a balance greater than 20 percent of the card’s credit limit. A professional traveler should have a third card just for business travel.”
—Mike Sullivan, personal finance consultant, Take Charge America, Phoenix, AZ
Not keeping tabs on late payments and reports to credit bureaus
“Making a late payment can cost you more money and have a negative impact on your credit score. A payment that’s even a day late will trigger a late payment fee and an interest charge as well. If your payment is more than 30 days late, it will get reported to the credit bureaus. Payment history is the most important element of your credit score and one late payment will impact it. Make your payments on time, even if you can only make the minimum payment! If it helps, set up auto pay or a monthly reminder so you don’t forget. Not only will it help to keep your credit score healthy, it is the best way to improve a less than great one.”
—Rachel Rabinovich, director of financial planning, Society of Grownups, Boston, MA