Credit cards have become the financial staples of modern life. Most people that sign up for a new credit card are not doing so with the expectation of accruing debt—but, too often, this becomes the case. Being aware of several common credit card pitfalls can help ensures your next credit card is not remembered as the cause of your financial woes.
Avoid the Temptation to Overspend
Most financial issues associated with credit cards are self-caused. Having a line of credit tempt many into making purchases they do not truly need to. Depending on one’s credit limit—you can get very deep into debt very quickly.
Know your spending habits and be able to recognize when you take on unnecessary risk. For example, do not buy that expensive travel package to the Bahamas if it is not within your budget. The key to maintaining healthy spending habits is to know your budget before being faced with spending opportunities. You can use a budget app to better assess your spending habits.
Comparing Rewards Points
Credit card rewards programs provide a range of benefits to cardholders ranging from free travel packages, free parking, and even cash back. Before being able to compare the best credit card rewards programs for you—it is important to understand you own spending habits. With these in mind, you can find a credit card with the best rewards program for your lifestyle and spending habits.
For example, the Amex Gold card offers card holders 4X membership rewards points per dollar spent in US supermarkets, 3X rewards points on flights booked directly with airlines, and 4X rewards points on dining. These are great rewards benefits—but only if you buy plane tickets, shop in approved grocery stores, and eat out frequently.
Paying Card Balances in Full
Credit card APR rates may sound like meaningless figures used to advertise, but they can significantly impact your finances. When you don’t pay off your credit card balance, you’re subjecting yourself to unnecessary interest fees.
By paying off your balance each month, you effectively avoid the APR fees and limit total non-purchase expenses to annual fees. There are certainly cases where credit card balances can’t be paid in full—such as unplanned expenses, emergency repairs, etc.—but working to pay down one’s balance as soon as possible is still advised.
Avoid Late Payments
Missing a payment on your credit card not only dings your credit rating but also costs you money. While not paying your balance in full will subject one to interest—missing a payment will also subject one to penalty fees.
Almost all major credit cards offer automatic payments. This means, once configured, a minimum amount of money will be automatically paid against your balance each month. These amounts are typically in the range of $25-$50 and rarely a cause for concern (i.e., over-drafting your checking account.) However, they can quickly help avoid damaging your credit score and costing you late payment fees.
Know Your Card Fees
Credit cards come in many designs, offer a range of associated services, and may (or may not) come with many associated fees. Annual fees, late payment fees, returned payment fees, and foreign transaction fees are but some of the fees that can accrue as unforeseen expenses.
As daunting a task as it seems—carefully reading your cardmember agreement is an essential part of having a credit card. Not only will it help you better plan for larger purchases and deferred payments, but it can also help you understand the types of credit card benefits you may (or may not) be receiving. For example, it pays to know if you have 1% or 2% cashback!
Final Thoughts
Common misconceptions regarding credit cards can quickly lead to financial pitfalls. The common pitfalls of credit cards are those that are likeliest to give first-time card owners trouble. More advanced concerns may include balance transfer fees, secondary account access fees, or renewal fees. Never be afraid to call you credit card company and ask for explanation of benefits!