When used responsibly, credit cards can have several positive effects on your credit score and are one of the best ways to get rewarded for your everyday purchases. That is why many new-to-credit consumers choose these products to get their foot in the door and build their way to bigger or better money products and interest rates.
However, without the proper understanding of the risks associated with credit cards, people can easily find themselves in debt, which can be challenging to manage. Bad credit card habits and behaviours can ultimately have adverse results on your credit rating.
Here are seven common credit card mistakes to avoid, so you can build your credit history, improve your credit score and keep earning those great rewards and perks.
- Missing payments
- Maxing out your credit card every month
- Paying your statement without reviewing it
- Not reading the cardholder agreement or disclosure summary
- Using cash advances
- Sticking to your first credit card
- Applying for credit too often
1. Missing payments
Try to make at least the minimum payment on your credit card every billing period. Although the best practice is to pay off your balance in full each month, it is not always realistic.
Missing payments, however, can affect your credit score and remain on your credit report for six years. Even if you make the payment and cover the cost of the overdue bill, the information stays on file, which lenders can see.
Also, missing payments can result in penalties from your credit card provider. Sometimes penalties are a one-time fee or an interest rate increase—often significantly more than the standard interest rate. Additionally, if your account is not in good standing, you may no longer be eligible for welcome offers or rewards program benefits.
2. Maxing out your credit card every month
Although you may have a large credit limit, it is unwise to use the entire amount each month. Not only can you go over your limit and incur fees, but you can also damage your credit score.
Experts recommend staying below 30% of your credit utilization. That means cardholders should use less than 30% of the total available credit they can access from all credit cards, credit lines and loans combined. So, if you have a $3,000 credit limit and a $5,000 line of credit, you would have $8,000 in available credit. To stay within a 30% credit utilization ratio, you would ideally spend less than $2,400 across all credit products at any given time. Consistently using 100% of your limit signals risky credit behaviours to lenders.
Going over your limit can hurt your credit score, and you can incur over-limit fees. Often, providers charge $25 to $30 for making this mistake. To avoid these extra costs, you may be able to set up alerts on your account to get notified when you are reaching your limit.
3. Paying your statement without reviewing it
Technology has reduced the need to perform many menial tasks, including paying bills. Many credit card providers have auto-pay, allowing customers to pay their statement in full and on time, every time, without a worry.
However, this little luxury can leave cardholders to neglect their credit card summaries. Reviewing your credit card bill can help catch identity theft, fraud, double-payments or transaction errors. Plus, it can be helpful to track how much you are spending and where, so you’ll know if you are within budget or need to cut back.
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4. Not reading the cardholder agreement or disclosure summary
Every credit card will come with a cardholder agreement, and in it will be all the fees, features, and conditions.
Credit cards have three different interest rates:
- Annual percentage rate (APR) or annual interest rate on purchases: This can vary depending on the card. The average interest rate is around 19.99%, however many cards sport low-interest rates, and some have higher interest rates, particularly those intended for rebuilding credit.
- Balance transfer APR: Generally, credit cards will offer balance transfer promotions as an incentive to switch providers. The promotional interest rates are usually quite low; however, a small transfer fee typically applies.
- Cash advance APR: Taking out cash from your credit card or making an immediate cash-like purchase, comes at a cost. Not only do fees apply, generally around $5 per transaction, but interest rates are typically 7% to 10% higher than on purchases.
Other details may include:
- Grace period: This is the amount of time, typically a specific number of days, before you start to accrue interest, also known as the interest-free grace period.
- Annual fee: Many top rewards cards have annual fees, usually in the range of $100 to $150. Some welcome bonuses will include an annual fee waiver or rebate. However, after the first year, the fees will apply.
- Foreign transaction fees: Many credit cards charge foreign transaction fees or FX-Markup equal to 2.5% to 3% of foreign currency purchases. This rate is on top of the currency conversion rate. So, the costs can start to add up. Some credit cards have 0% foreign transaction fees.
- Some other fees or penalties include:
- Over-limit fees
- Dishonoured payment fees
- Statement reprint fees
- Credit balance refund fee
- Inactive account fee
You may be surprised to see benefits there as well. Many credit cards provide some sort of insurance like an extended warranty or purchase protection coverage. Others have full suites of travel insurance or perks like roadside assistance. Knowing the details of these features can help you make a claim or use them if necessary. The RATESDOTCA credit card marketplace shows all the details on the perks and rewards offered by the top cards in Canada.
5. Using cash advances
Using your credit card like a debit card at an ATM will likely cost a cash advance fee, an ATM fee, and higher interest rates. The immediate fee may only be around $5 per transaction; however, interest starts accruing from day one and are generally a lot higher.
A line of credit from the bank can also give you cash in hand and generally have low-interest rates. The catch, these products take time to apply for and get approved. Applying for a line of credit in advance of when you may need it can spare you from having to use cash advances.
6. Sticking to your first credit card
Often, people’s first credit card has a small credit limit and few perks. Over time, as you build your credit score and credit history, you become eligible for better products. Upgrading to a better credit card and increasing your credit limit can help you stay within that 30% credit utilization ratio and access more benefits and rewards.
However, before you close that account, think about the payment history, which counts for 35% of your credit score. Keeping the credit card as a secondary card may be more beneficial than closing the account, even if you are not using it. The credit limit will still count toward your credit utilization ratio and can be handy in emergencies. Just make sure you are not paying an annual fee on it.
7. Applying for credit too often
Applying for lots of credit within a short period can signal an urgent need and send up a red flag to lenders. Not only that, but credit inquiries count for 10% of your credit score. When lenders request your credit report, it is considered a hard inquiry. Hard inquiries can stay on your credit report for up to three years. One or two hard inquiries will have a small effect on your credit score; however, many inquiries can have a significant impact on your rating.