If you’re like most people, you probably use your credit card for a lot of your day-to-day purchases. It’s a quick and easy way to pay for things, without having to worry about carrying around cash. However, if you’re not careful, using your credit card can lead to some costly mistakes. In this blog post, we will discuss 5 of the most common credit card mistakes and how to avoid them!
Understanding Credit Cards
Before we get into the top mistakes credit card users make, it’s helpful to look at the product of a credit card itself. By understanding how credit card companies make money, it will be easier to see how making certain mistakes can end up costing you.
A credit card is essentially a loan that the credit card company extends to you. When you purchase with your credit card, you are borrowing money from the credit card company and will need to pay it back over time, with interest. The interest rate is the fee the credit card company charges you for borrowing money.
Credit card companies make money in two ways: through interchange fees and through interest charges.
Interchange fees are the fees charged to merchants every time a customer uses their credit card to make a purchase. These fees are generally around 1% and are paid by the merchant, not the customer. Some card companies charge more than others – this is why many stores don’t accept American Express, as their fees are higher. If the merchant is charged a higher fee, then that is cutting into their profits. It is also common to see merchants accept cards for payments above a certain limit. This is also due to the fees credit card companies charge.
Side note – this is why credit card companies entice you to use their card and earn rewards. Each time you swipe, you are making them money on the fees they charge merchants.
The second-way credit card companies make money through interest charges. As we mentioned before, when you borrow money from a credit card company, you will need to pay that money back over time, with interest. The interest rate is the fee charged by the credit card company for borrowing money. Credit card interest rates can be anywhere from 10-25% or more.
Now that we understand how credit card companies make money, let’s look at the top mistakes people make when using their credit cards. We will also detail how to avoid them while reaping benefits.
1. Not Understanding Interest Rates And Fees
One of the most common mistakes people make is not understanding interest rates and fees. When you get a credit card, be sure to ask about the interest rate and fees associated with the card.
Interest rates and fees can vary greatly from one credit card to another. With this in mind, it’s important to understand what you’re being charged before using your card. Many people make the mistake of thinking that all credit cards have the same interest rate and fee structure. In reality, this is not true and rates and fees can vary greatly.
Interest rates and fees can also change over time, so it’s important to keep an eye on them and make sure you understand how they work. Many people are surprised to find out that their interest rate has increased or that they’re being charged fees they didn’t know about.
To avoid this mistake, be sure to ask about interest rates and fees when you get a new credit card and keep an eye on them over time. You can find out your interest rate by reading your credit card agreement or by calling your credit card company.
2. Not Paying Off Your Balance In Full Each Month
Another common mistake people make is not paying off their balance in full each month. This can lead to costly interest charges and can damage your credit score. To avoid this, make sure to always pay off your balance in full each month. You can set reminders or set up automatic payments to help you stay on track.
If you can’t pay off your balance in full, try to at least make more than the minimum payment. This will help reduce the amount of interest you’re charged and will help improve your credit score over time. It’s also to be mindful of your spending. Only buy things with your credit card if you are absolutely sure that you can pay them off at the end of the month.
3. Not Checking Your Credit Card Statement Each Month
Another mistake people make is not checking their credit card statement each month. This can lead to missed payments or unauthorized charges. To avoid this, make sure to check your statement each month and report any suspicious activity right away. You can usually find your statement online or you can call your credit card company to have them send it to you.
4. Spending More Than 30% of Your Total Credit Limit
This is one of the most common mistakes people make with their credit cards. If you spend more than 30% of your total credit limit, it will hurt your credit score. It’s important to keep your balances low to maintain a good credit score.
If you find that you’re regularly spending more than 30% of your credit limit, it’s time to start paying down your balances. You can do this by making a budget and sticking to it. You may also want to consider applying for a higher credit limit. This will give you more room to work with and will help improve your credit score.
5. Spending Credit On Liabilities & Not Assets
Although other forms of loans such as mortgages or car loans are often thought of as “good debt,” credit card debt is often seen as “bad debt.” This is because it’s easy to rack up a lot of debt on your credit card without really understanding how much you’re spending.
The interest rates on credit cards are usually high but if you can find a high ROI investment with low risk, you can make your money work for you by using credit to fund it.
For example, Robert Kiyosaki funded his first rental property using a credit card. He does not recommend this but in his case, it worked out for him. By using credit to fund an asset, he was able to secure an undervalued asset. Just be sure that you understand the risks involved before you use credit to fund any investments.
To avoid this mistake, be mindful of what you’re spending your credit on. Remember that it’s debt that you have to pay off and if it’s not an investment, it’s probably not worth going into debt for.
Be mindful of your spending and only use credit when you can afford to pay it off in full. Even if it’s an undervalued asset, you should have other sources of income that can pay off the debt if the worst-case scenario happens.
Avoidable Credit Card Mistakes – Summary
These are just a few of the most common mistakes people make with their credit cards. By avoiding these mistakes, you can save money and improve your credit score. Just be mindful of your spending, pay off your balance in full each month, and check your statement regularly to avoid any unwanted charges. With a little bit of care, you can use your credit card to your advantage.
Do you have any other tips for avoiding common credit card mistakes? Share them with us in the comments below!