Credit cards can be a miracle when they provide a simple way out of a tough jam. But credit cards also make it easy to overspend, and they often come with a price — annual fees or interest on balances carried over each month.
In short, handle your cards responsibly, or they will wreak havoc on your finances and credit score.
If you’re in the market for a credit card, choose one that charges low or no annual fees. The Money Talks News credit card search tool allows you to filter search results based on credit card features like fees and rewards.
Once you have a card, avoid the following 10 most common credit mistakes that can cause long-term damage to your financial standing.
1. Ignoring your credit reports
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It’s easy to assume that your credit report is stellar. However, all it takes is one bad move on your part — or some shady activity by 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 might be reported as open, or vice versa.
- Errors you thought had been corrected might 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. You might pay higher interest rates on loans, or be restricted to smaller lines of credit.
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
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A cash advance on your credit card is actually a short-term loan — and 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 do so, pay off the advance quickly because the costs keep multiplying until you do. Or explore other types of loans that aren’t as expensive.
3. Paying bills late
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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 alerting you that 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
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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, the most-used credit score from Fair Isaac Corp., which also goes by FICO.
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.”