Don’t Make These 4 Credit Card Mistakes

Managing your credit cards can be time consuming, especially if you are in debt. There are a host of moving parts with credit cards, from the interest rate to the due date and annual fees. It can be easy to stumble and miss a payment or be tempted to take out a cash advance in a pinch.

Here are some of the most common mistakes consumers make when it comes to credit cards.

• Late Payments

Typically, your monthly credit card payment is due on the same day each month, whether it’s the first or the fifth of the month. Making a late payment will trigger several things from the credit card company so it’s best to stay on top of it.

First, a late fee will kick in. Late fees can be as high as $35. Your credit card prospectus will reveal what the late fee is on your particular credit card. Secondly, interest charges will start to accrue. Interest rates on credit card can be as high as 15%. Even if you pay late by one day, you’ll still pay interest for that day. Credit card interest is calculated on a daily basis. Credit card interest only accrues if you fail to pay off the balance in full by the due date. Remember, paying the minimum payment, even if on time, will result in interest charges. The minimum payment is only a fraction of the amount you owe.

Another consequence of making a late payment is that the credit card company will likely raise your interest rate as a penalty. Printed on the credit card statement is a small disclosure stating what your new interest rate will be if you make a late payment. The rate hike could be as high as 10 percentage points.

If you stumble and simply forget to make your payment, try calling the credit card to see if they’ll credit back the late fee and interest charges and reverse the rate hike. They may accommodate your request if this is your first late payment. But if this is a habit, you’ll have to live with the financial consequences.

One way to avoid late payments is to set up an auto payment for your credit card. Each month, the credit card balance will be automatically deducted from your checking account. This way, you don’t have to worry about remembering to log on and make your payment. You should still log in regularly and review your credit card statements to look out for any suspicious activity. You can also set an alert on your smartphone to remind you to make the credit card payment by the due date.

• Cash Advances

Each credit card has a credit limit. This is the maximum amount of money that can be charged on the card. But this amount can also be used to get cash, just like an ATM. Tapping your credit limit for cash is called a cash advance. This is helpful for consumers who need cash immediately. If you need cash to make your rent and your landlord doesn’t accept credit cards, a cash advance can be a solution.

But cash advances are quite expensive. The typical fee is the greater amount of these two scenarios: a $10 flat fee or 5% of the cash advance amount. A $2,000 cash advance would result in a $100 fee. A $150 cash advance would spark the $10 flat fee (because 5% of $150 is only $7.50).

It’s not just the fees that you need to worry about. Cash advances must be paid back with interest. The rates for cash advances are typically many percentage points higher than the interest rate you’ll pay for having debt on your credit card. The interest rate for cash advances can also be found in the credit card prospectus.

A cash advance should be your last resort. If you’re in need of cash, see if friends or family can help or consider selling your old smartphones, clothing or other treasures in your home.

• Closing Down Your Credit Card

Closing down a credit card can hurt your credit score. This is because 15% of your credit score accounts for how long your credit cards are open. If you close down your credit card, you are erasing important credit history from your report.

Closing a credit card after a year won’t likely impact your score, but closing a credit card you have had for several years will likely lower your score. It’s important for the credit bureaus to be able to access years and years of credit history to get a better sense of how responsible you are with money, and Closing down credit cards makes this process harder for the credit bureau, hence the negative impact on your credit score.

While the impact on the score won’t be as deep as leaving a debt balance on the card, it could still ding your score by around 10-20 points. A high credit score is required in order to be approved for a mortgage or car loan. A higher credit score results in a lower interest rate on these loans which translates into lower monthly payments.

• Authorized Users

Many parents will allow their adult children to become authorized users on their credit card. This is a great way for young people to develop a credit history of their own. But if your child isn’t aware of the consequences of spending too much money on the credit card, you could end up footing a huge bill thanks to your kids.

The credit card company is going to ask you to pay the bill, even if your child was the one who charged up the balance as an authorized user. This is why it’s important to talk to your kids about money and set aside a maximum monthly budget amount that they should stick to. You don’t want to be blindsided by purchases that your kids made on your credit card.