Responsibly using your credit cards in a careful manner can be a great positive factor in maintaining your financial health. Even a seemingly benign mistake, such as accidentally forgetting to a make a payment on time, can end up costing you lower credit limits and higher interest rates. Taking some steps to avoid common credit mistakes can help you to take advantage of all the benefits your credit cards have to offer.
Only Making Minimum Payments
It’s in your credit card company’s best interest to keep you paying the monthly minimum balance because they are able to maximize the interest in the long term. As a result, the interest that you may end paying on your outstanding amount can even surpass the value of your original purchases over time. Simply increasing your payment by as little as 25 percent over the monthly minimum can drastically reduce the total interest and the time it takes to repay the balance.
Paying Your Bill Late
Besides completely missing a payment, few mistakes can be as costly as consistently paying your bill late. Not only will you have to deal with the initial late payment penalty, but your late payments are often reported to the credit bureaus, which inevitably lowers your credit score. In addition, you may also be subject to further penalties, such as a lower available credit limit. If applicable, you should set up automatic online payments through your bank to prevent this harmful mistake.
Review Your Monthly Statements
Consistently checking your monthly credit card statements as they arrive can help you to stay on top of your payment due dates, identify errors and catch any possible fraudulent activity. At first glance, your credit card statement may seem intimidating, however, it is in your best interest to learn the meaning of every number, term and percentage point regarding your account.
Taking Cash Advances
In most situations, it is not a good idea to take a cash advance from your credit card. Unlike regular purchases, a cash advance has a transaction fee and a higher interest rate. Furthermore, interest starts accruing immediately because cash advances don’t have a grace period. Unless it’s an emergency, explore all other options before taking a cash advance.
Exceeding Your Credit Limit
You need to pay attention to your credit utilization ratio, which is the ratio of your credit card account balances against your available credit, to avoid maxing out your credit cards. Keeping your credit utilization ratio low will improve your credit score and increase your chances of getting low-interest loans and lines of credit. If you are nearing the maximum limit on any of your cards, consider paying down the debt or using another form of payment for future purchases.
Although the Credit CARD Act of 2009 does help to prevent credit card companies from adopting abusive practices, such as arbitrarily increasing interest rates, you can also avoid common mistakes and costly charges by diligently paying attention to your credit card practices.