Ever wish there was a sort of Driver’s Ed for credit cards — or even just a Complete Idiot’s Guide?
While there is no law requiring you to learn about credit cards before the training wheels come off, you can save yourself lots of headaches — and money — by reading up on some of the most common credit card mistakes that people make.
In the first article in this series, we covered some common — and costly — credit card blunders that nearly all of us make at one point or another. Here are 5 more foolish credit card mistakes that you may not realize you’re making.
Silly Mistake #6: Juggling too many credit cards
If you’re one of those people who have never seen a credit card offer you don’t like, chances are that you’ve amassed a sizeable collection of credit cards. For people with excellent credit, tantalizing credit card offers abound. Not surprisingly, Americans, on average, have 3-4 credit cards, and many have more than 10.
However, applying for credit cards frequently may dent your credit score. Furthermore, it’s important to use all the credit cards that you do have. Card issuers are more likely to close or scale back credit limits on unused accounts — and that could also hurt your credit score.
At the same time, using too many credit cards at once sets you up for trouble: With payments due on numerous credit cards each month, it’s a lot easier to overlook a payment. And if you overlook a bill for more than 30 days, it will cause a lot more harm than “simply” a $25-35 late fee. It will pull down your credit score for a very long time.
How to avoid making this mistake again: Keep the number of credit cards that you use each month to three or less. If you’re concerned about credit accounts being closed or limits slashed, cycle through your credit cards so that they are used regularly (for example, every three or four months). You should also synchronize your credit card payment due dates to make it easier to keep track of when bills are due.
Silly Mistake #7: Paying unnecessary fees
Would you send an extra $25 to $39 to your card issuer if asked? Of course not. Yet, tens of thousands of cardholders pay that much in penalty fees on a regular basis. Prior to the Credit CARD Act of 2009, Americans paid more than $15 billion a year in penalty fees alone. And even though many fees have been limited following the new credit card rules, other fees have increased considerably and, in some cases, new fees have been introduced.
How to avoid making this mistake again: Know your fees. Here are some of the most common fees that you should watch out for:
• Late fees: The typical cost of a late fee is $25 for the first slip-up and $35 for the second within a given six-month period.
• Over-the-limit fees: These can run as high as $39, so watch out.
• Balance transfer fees: Balance transfer fees commonly range between 3 and 5 percent of the transaction amount, depending on the issuer.
• Cash advance fees: These are typically set at 3 percent of the advance with a minimum of $10 due.
• Foreign transaction fees: Foreign transaction fees charge up to 3 percent for each transaction.
• Annual fees: These are mostly waived the first year, but many people forget to cancel the card the second year.
Card issuers often tack on other fees as well, so carefully read through your credit card statement to stay up to date on the fees that apply to your credit card.
Silly Mistake #8. Falling into the 0 percent APR trap
It is said that there is no such thing as a free lunch; but 0 percent APR credit card offers seem to fit the bill. People with great credit can access a zero interest loan of as much as $10,000 (and in some cases more) in a matter of minutes, simply by filling out an online credit card application.
How can credit card issuers afford to give out zero interest loans to lots of consumers for long periods of time, no questions asked? Because once the promotional period comes to an end, 0 percent APR credit cards feature some of the highest interest rates in the industry. And enough people end up paying those high interest rates on their “free” 0 percent APR loan to make these offers worthwhile for card issuers.
How to avoid making this mistake again: Before applying for a 0 percent APR balance transfer, make a plan for how large a 0 percent APR loan you can afford to take out. Figure out how much you can afford to pay each month, and then multiply that by the number of months the 0 percent APR offer lasts. That’s the loan amount you can afford. Not more, not less. Hoping that you will somehow get the extra money to pay off a larger balance before the 0 percent APR expires, or planning to take out another 0 percent APR offer, just sets you up for trouble.
Silly Credit Card Mistake #9: Going on a rewards card binge
It’s easy to spend more than planned on credit cards, and with rewards credit cards, it’s even more so. Whether it’s a short-term 5 percent cash back offer or a rewards card spending limit you’re trying to meet to reach a higher rewards category, it can be tempting to make purchases you wouldn’t otherwise have made, or that you should have waited to make. But this can easily get you into trouble.
How to avoid making this mistake again: Do the math. Rewards terms are typically phrased in a way that makes them sound like an incredible deal. However, once you calculate the true dollar earnings, you’ll find that rewards earnings are rarely worth the extra expenditure.
Silly Credit Card Mistake #10: Not communicating with credit card issuers
Incurred a late fee because of a slip-up? Call your card issuer. Most card issuers will waive at least one late payment for good customers — particularly if it’s the first time you make one.
Planning to take out an unusually large balance transfer to finance a small home remodeling project? Again, call your card issuer and explain why. Then specify exactly when you plan to pay the balance off. Card issuers review credit accounts regularly, and if you suddenly have an unusually large balance, it could be a red flag. Having a note on your record explaining what you’re doing will help prevent slashed credit limits or other preemptive actions.
How to avoid making this mistake again: Know what to communicate and what to leave out. Most card issuers will work with cardholders to keep their business — as long as the cardholder has a history of making regular payments and has otherwise been a good customer.
However, be wary of communicating financial information that suggests financial hardship because it could quickly backfire. It may be possible to negotiate a reduced interest rate on outstanding credit card debt or a skipped payment; but only resort to this if you have no other choice. It generally is not a good idea to share information that indicates that you are in financial trouble.