5 Silly Credit Card Mistakes That Nearly Everyone Makes
By Eva Norlyk Smith, Ph.D.
March 14, 2011
It is much simpler to use a credit card than, say, to drive a car. Even a 12-year old can be taught to swipe and sign in a matter of minutes. But it is not so simple to use a card responsibly.
There is no mandatory Driver’s Ed class for credit cards. But you can still get plenty hurt if you don’t watch out. Here are 5 silly credit card mistakes that nearly everyone makes – and 5 ways that you can avoid them.
Silly Mistake #1: Not knowing how much you spend each month
That gasping sound heard in American homes every month after the credit card bill drops in the mailbox? That’s millions of consumers waking up to the fact that their credit card bill — yet again — is much higher than they thought it would be.
Not keeping track of charges on a credit card is probably the most common credit card mistake that people make. With debit cards and checking accounts, there’s no way around keeping track of expenses. You have to in order to avoid overdraft fees. However, the credit limit on credit cards provides consumers with a nice cushion, making it less essential to track charges. But don’t be fooled. It’s just as important to keep track of credit card charges as it is to keep track of other expenditures. If you don’t, chances are, you will overspend, and you won’t have enough money to pay the credit card bill off at the end of the month.
How to avoid making this mistake again: Set a monthly limit for how much you can charge to your credit card based on how much you can pay off at the end of the month. Then, get a blank check register at your bank, and enter the monthly limit in the balance column. Each time you pay with a card, enter the charge in the expense column and subtract it from the monthly limit amount so you keep a running total of how much is “left” to spend on your account.
Silly Mistake #2: Not paying the bill in full each month
Not paying off one’s credit card bill in full each month may seem innocuous. However, this is where credit card trouble usually starts. Each consecutive month that a credit card balance is carried forward and allowed to grow, it becomes just a little harder to pay off.
Carrying a balance forward on a credit card every now and then is no big deal — particularly if it’s on planned purchases. But if it happens month after month and the balance continues to grow, you’re heading for trouble.
How to avoid making this mistake again: The earlier that you recognize that you’re getting into credit card debt and take action, the easier it is to tackle the problem. Put your credit cards in a drawer and pay your expenses with cash, checks or debit cards until all of your credit card balances are paid off.
Silly Mistake #3: Using your credit card like a debit card
Cash advances are a great convenience; but the cost of using credit cards for cash advances is not just a 3 percent cash advance fee. Astronomical interest charges are also tacked on. For a credit card with a 16.99 percent purchase APR, the cash advance APR can run as high as 23.99 percent. Furthermore, card issuers give no grace period on cash advance balances, so interest begins to accrue right away.
How to avoid making this mistake again: Use only debit cards for cash advances. If you have to make an exception, pay off the credit card balance in full as soon as you can to erase the high interest cash advance balance.
Silly mistake #4: Not checking your credit card statement each month
Paperwork is a nuisance, and it’s easy to just pay the credit card bill each month and be done with it. However, there are several good reasons to review your monthly credit card statements — and not just to check for fraudulent activity.
For example, many people sign up for ongoing monthly subscriptions, such as gym memberships, stop using the service and then forget about the automatic monthly charges that are still accruing. Human error is another factor: Sometimes merchants accidentally double charge or don’t issue a requested refund.
Going over monthly charges can also alert you to shopping habits that need to be reined in, particularly if you find that you spend a lot on unplanned or unnecessary purchases.
How to avoid making this mistake again: Review the statement carefully before paying the bill, and contact the merchant if there’s a charge you don’t recall making. If paying online, review the monthly charges, and then download the statement information into a spreadsheet or accounting software to track spending patterns over time.
Silly mistake #5. Saving and carrying debt
If you have money in your savings account and carry credit card debt at, say, 18.99 percent, are you really saving? No. With a savings rate as low as 2 percent, you’re actually netting a negative 16.99 percent.
For perspective, consider this. If you were carrying a $5,000 credit card debt, that’s $850 in annual interest charges that could have been avoided. Of course, there is good reason to keep some savings in an emergency fund should the need arise. But the question is, how much? For people with high interest credit card debt, it might just be too costly to keep a lot of money in a low interest savings account.
How to avoid making this mistake again: The typical rule of thumb for emergency funds is to keep enough money to cover three to six months of expenses. However, if you have high interest credit card debt, consider cutting the emergency fund to cover just one or two months. Then use the remaining savings to pay down the credit card debt aggressively; the savings in credit card interest charges will help speed up the process further. After the credit card debt is paid off, grow that emergency fund back to a size that can cover three to six months of expenses.