10 worst credit card mistakes
By Kay Bell and Karen Haywood Queen
Whether you’re in a financial crunch, dream of an island vacation or want to earn more rewards, credit card offers may appear to be the solution.
Not so fast, says Joanne Kerstetter, spokeswoman for Money Management International.
“Just because you’re getting credit card offers doesn’t mean the credit cards are right for you,” Kerstetter says. “They might be right for your shredder. Especially if you’re in a financial crunch, more credit is not the solution.”
Experts’ advice can steer you away from the top 10 credit card mistakes.
1. Getting too many
Bypass the shredder and you could make one of the most common credit card blunders by collecting too many credit cards. “Stop and think: do you really need another credit card?” Kersetter says. “The more credit cards you have, the better chance you have of getting deeper in debt.”
Remember, credit cards are not a form of supplemental income, says June A. Schroeder, a certified financial planner with Liberty Financial Group Inc. in Elm Grove, Wisconsin.
The annual fees of multiple cards also can add up, Kersetter says.
Having too many cards can also negatively impact both your credit score and your ability to borrow money, she says. On one hand, adding more cards helps your score by lowering your credit utilization ratio — the amount of debt you carry compared to your available lines of credit. On the other hand, “If you have a lot of credit cards with high credit limits and you go for a mortgage, the lender will take into consideration, ‘What if you ran those credit cards up? What would your debt-to-income ratio be?’ ”
How many is too many? “We have people who are successful using one card because it’s easy to track with all their records in one place,” Kerstetter says. “Having three to five credit cards is usually not a problem. But if you find your credit card balances are increasing, that’s a danger signal. The solution is definitely not another card.”
2. Misunderstanding introductory rates
But, you argue, that new card will help you manage your money better because you can transfer other balances to a no-interest account. Welcome to credit card mistake No. 2: being misled by introductory rates.
Deferred interest deals are a type of introductory rate that traps many consumers. The deals, often offered with big-ticket purchases such as appliances or furniture, contain a financially lethal tripwire: Interest accumulates from the day of purchase. If you don’t pay off the debt during the introductory period, interest charges are charged retroactively, and usually at a high rate.
“People don’t look at what the rate’s going to be once the teaser is over,” says Daniel Wishnatsky, a certified financial planner and owner of Special Kids Financial in Phoenix. “The assumption is that it’s going to be a reasonable rate. But with these particular loans, it’s not unusual for it to go up to 18 to 20 percent. They’re surprised six months later when it expires. But if they’d done their homework, they wouldn’t be.”
3. Not reading the fine print
That homework is reading the offer’s fine print. Not doing so is credit card blunder No. 3.
That tiny text insert is where you’ll discover when the 0-percent or very low interest rate expires. It’s also how you can find out about any balance transfer fees, as well as any offer limitations. In most cases, the introductory rate applies only to balance transfer amounts or new purchases for a certain period of time, says Schroeder.
“Reading the fine print is so important,” Schroeder says. “Some credit cards seem attractive with a low introductory rate. But if you read the fine print, they charge a percentage to transfer the balance and after a certain period the interest rate goes up dramatically.”
The fine print in today’s credit card offers include two-tier balance transfer fees, which can make balance transfers unexpectedly expensive, and — surprise! — security interest clauses that allow card issuers to repossess property bought with credit cards if you fall behind on payments.
4. Choosing a card for the wrong reasons
You might be tempted to ignore the fine print because the card has other attractions, such as a rebate or rewards program. Don’t, or you’ll make credit card mistake No. 4: choosing a card for the wrong reasons.
It’s important to figure out what card is best for you and your lifestyle, Kerstetter says. “Rebates are important and it’s important to make sure you’re getting the best deal possible. But if you’re carrying a balance and paying high interest, those rebates and travel points aren’t really worth it. Rebates and travel points work the best if you’re not carrying a balance and have a low interest rate.”
5. Not rate shopping
Look for the best possible APR, or interest rate. Not shopping around is credit card mistake No. 5.
It’s especially important to note the rate on unsolicited offers. If you’re struggling financially, you’re not likely to get the most favorable rates or terms. You’ll be paying higher interest rates. So compaison chop for a credit card.
6. Making minimum payments
Let’s say you do need another card. You read the fine print, you completely understand the terms and you get a competitive rate. But even after choosing the perfect credit card, people still make mistakes, such as No. 6 on our list, making only the minimum payments.
“People don’t realize how difficult it is to pay off loans at a high rate,” says Wishnatsky. “You’re going to be paying it for your next three lifetimes.”
The best strategy is to pay off the balance monthly, Kerstetter says. “You got to use the money all month and get the travel points or other rewards.”
CreditCards.com’s minimum payment calculator can show how long it will take to pay off a bill if you send only the minimum each month. Let’s say, for instance, you have a $5,000 balance on a card with a 14 percent APR, and your card issuer’s minimum payment formula calls for you pay 1 percent of the principal plus interest charges monthly. If you pay only the minimum, you’ll end up paying another $5,000 in interest and take nearly 18 years to pay off the balance.
7. Paying your bill late
Making late payments, blunder No. 7, is better than not paying at all, but not by much. Not only will you face a late-payment charge, which could be higher than your minimum payment, your tardiness will show up on your credit report, damage your FICO score and make it harder to get better terms for future loans and accounts.
Check your account statement for the due date and make sure you send your check or pay online in plenty of time. Issuers used to play games with due dates and times, changing them at will and not allowing for weekends or holidays. The Credit CARD Act of 2009 made significant changes to reduce these dangers by mandating that due dates fall on the same day every month, and allowing payments that arrive on the first business day after a holiday or weekend to count as on-time.
But you still need to be careful. The law requires, for example, the deadline be no earlier than 5 p.m., but law does not specify which time zone that deadline applies to but in practice, major card companies tend to define their due times in the Eastern time zone — important to keep in mind if you live in a time zone farther west, Schroeder says.
If you’ve set up an automatic payment via your bank, make sure the time and date are taken into account, says Schroeder.
8. Ignoring your monthly statement
You can avoid late payments by checking your credit card statement. Not doing so is mistake No. 8. Checking your statement will help you pay your bill promptly, as well as allow you to make sure that the charges on it are correct. “In these days of ID theft, you need to check your bills religiously,” says Schroeder. And you need to do so as soon as the statement arrives. If you wait too long to dispute a charge, says Schroeder, “you’re essentially accepting it.”
Usually you have 60 days to dispute an amount, Schroeder says, adding that she hates to give that limit because people often will wait the entire 60 days.
If you plan to dispute a charge, then don’t pay the disputed amount, she says.
9. Exceeding your credit limit
Checking your statements also can keep you from exceeding your credit limit, mistake No. 9. Although the CARD Act ended the policy of automatically enrolling customers in over-limit programs that charged hefty fees, it still can be embarrassing to have your card rejected at the cash register.
“If you’re near the top of your credit limit, try really hard to pay in cash for subsequent purchases or get an increased credit line,” says Schroeder. “If you don’t, your purchase will be rejected unless you have opted in, authorizing your card company to charge over-the-limit fees. It’s better to check your statement and learn self-discipline.”
10. Buying things you don’t need
Careful statement examination also could prevent the 10th credit card blunder — using plastic to purchase things you don’t need. “We find people spend more money using credit cards than cash,” Kerstetter says.
Peruse your credit card bills and analyze what you spend, say Kerstetter and Wishnatsky.
“Go over your credit card bills every month and you’ll be amazed at the number of items that, upon reflection, you could have done without,” says Wishnatsky. “It’s surprising how many purchases we make that we think are needs, but are impulse buys.”
The Phoenix financial planner tells his clients who are considering a significant purchase to wait 48 hours, if at all possible. “If you still want it, wait another 48 hours,” Wishnatsky says. “Then if you have to get it, then get it.”
Also use your statements to help you create a budget. Wishnatsky realizes many people cringe at the “B” word, but he says control of your spending and your credit card usage doesn’t have to be a way to deprive yourself. Instead, it can be a way to make things happen in financially positive ways.
“Once you get control, even to a degree, it frees you from this constant money worry,” says Wishnatsky. “You might find there are things that you can actually end up having if you just have a plan, if you get your financial desires in tune with your financial resources.”
Karen Haywood Queen is a freelance writer whose work has appeared in AARP Bulletin, Better Homes and Gardens, Costco Connection, Executive Travel, Family Fun, Smart Grid Today, Smart Homeowner, US Airways magazine, and many other publications. She also writes for businesses. Karen lives in Williamsburg, Va., with her rocket scientist husband and two children.