10 Common and Costly Credit Missteps

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, you need to 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. Stop by the Money Talks News Solutions Center and use our credit card search tool. It 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 report

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 (CFPB). A few examples:

• You might find someone else’s credit information in your report.
• A closed account might be reported as open.
• 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 a credit report can cost you money. You might pay higher interest rates on loans, or be restricted to smaller lines of credit.

The three major national credit-reporting bureaus — the companies that maintain 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 — and an expensive one. Unlike when you withdraw cash from your bank account via debit card, a cash advance via a credit card generally costs you a steep cash-advance fee as well as a high 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

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 to send your credit score south. 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. The amount of money you owe on your credit card accounts for 30% of your FICO credit score, the most-used 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 CFPB 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 creditworthiness. Hard inquiries are noted on your credit reports, and having too many 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. That’s how the amount you owe compared with the amount of credit available to you.

For more on the topic, check out “Should I Cancel My Credit Card?”

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

Before you apply for a store credit card offer, ask yourself whether a measly 15% off a purchase makes up for the high interest and fees that come with these cards.

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 the annual fee won’t swallow up all the perks. And if you carry a balance on a rewards card, the higher interest rates of these cards generally will nullify the benefits.

10. Failing to read the fine print

When you apply for a credit card, you agree 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.