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
Casper1774 Studio / Shutterstock.com
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
Galushko Sergey / Shutterstock.com
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
Newnow / Shutterstock.com
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
leungchopan / Shutterstock.com
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.”