For most people, credit cards are an indispensable tool. They’re a convenient, secure payment method that also lets you earn rewards and build credit that will help you later on in your financial journey.
But as a tool, credit cards must be used carefully. Otherwise, you could easily make mistakes that cost you money, wreck your credit, or land you in credit card debt.
The typical consumer has three open credit cards and a balance of $5,525 in 2021, according to a report by the credit bureau Experian. If this sounds like you, it may be time to reevaluate your credit card usage; carrying a balance on your card from month to month can cause you to damage your credit and rack up debt.
Along with carrying a balance on your card, here are the six most common credit card mistakes consumers make — and how to avoid them.
1. Never Paying Off Your Card in Full
At the end of every billing cycle, your credit card company will list your statement balance and a minimum payment amount. The minimum payment is usually a small percentage of the statement balance, often 2% to 4%.
But paying only the minimum balance is one of the most costly mistakes you can make.
It’s essential to pay off the statement balance in full, says Madison Block, a senior marketing communications associate with American Consumer Credit Counseling, a national non-profit credit counseling agency.
“Only paying the minimum will ensure that you stay current on your payments, but it means that interest will accumulate because you aren’t paying the full balance,” Block says. “It will prolong the amount of time you’re paying off your debt as well. Interest rates on credit cards can be high, so if you don’t pay off your balance in full every month, the interest can add up quickly.”
For example, if you have a credit card with a $1,000 balance and 16% APR, and you only pay the minimum payment of 2% of the balance each month, it would take you 126 months to pay off your debt. And you’d pay a total of $994.19 in interest — almost as much as the original balance.
Constantly carrying a balance will also raise your credit utilization ratio — your total debts divided by your total available credit — which could lower your credit score.
To get the best credit score, experts recommend keeping your credit utilization ratio under 30%.
2. Not Making Payments on Time
If you’re juggling multiple cards, it’s easy to lose track of due dates. But when it comes to credit card do’s and don’ts, one of the worst things you can do is miss a payment. When you miss a payment, you may have to deal with the following consequences:
- Late fees: Most cards charge late fees as soon as you miss your due date. Fees vary by card, but some can be as high as $39.
- Penalty APR: When you miss a payment, your credit card issuer can charge you a higher penalty APR that applies to your current and future balances.
- Damage to your credit score: A single late payment can hurt your credit significantly. The exact impact depends on your existing credit score and credit history, but late payments can drop your score by over 80 points, according to credit scoring company FICO.
To avoid late payments, create calendar reminders for yourself or set up automatic payments to automatically withdraw the minimum payment from your bank account on the due date. Even if you can’t afford to pay off your entire statement balance, make sure that you at least make the minimum payment on time.
3. Signing Up For Too Many Cards
“Signing up for multiple cards means that you may have a harder time keeping track of your finances with the multiple due dates for your different credit cards,” says Block. “Having too many credit cards also runs the risk of getting into debt because it may be tempting to use those cards to overspend with money you really don’t have.”
Even if you use your credit cards perfectly, there can still be negative effects from opening too many cards at once, says Todd Christensen, an education manager at Debt Reduction Services, a national non-profit credit counseling agency.
“Every time you apply for a credit card, the issuing bank will check your credit report,” Christensen explains. “These credit checks are called inquiries. More specifically, hard inquiries. The more hard inquiries you have on your credit report within the past six to 12 months, the more those inquiries will drag down your credit score.”
Instead of signing up for a bunch of cards within a short period, be more selective. Signing up for a new card once in a while can allow you to take advantage of special offers without damaging your credit.
4. Ignoring Your Benefits
When you open a new credit card, it’s important to understand how the card’s rewards program works, how to redeem your points or miles, and what extra perks are available. Otherwise, you could end up wasting money — especially if your card charges an annual fee for benefits that you don’t use.
“Credit cards often offer warranties and credit protections for certain purchases, particularly when traveling away from home,” says Christensen. “Many credit cards offer free insurance coverage on rental cars that rental car agencies charge $15 to $25 or more a day for. And many credit cards come with roadside assistance, in case you get stranded somewhere or need help with a dead battery.”
Other common benefits include:
- Cell phone insurance
- Lost or damaged baggage insurance
- Trip cancellation/interruption coverage
- Airport lounge access
- Membership credit for TSA PreCheck, Global Entry, or CLEAR
Generally, cards that charge annual fees will offer more benefits than ones that don’t. While cards with annual fees can be a good deal as long as you use enough benefits to offset the cost, if you find that you’re not using all the perks your credit card offers, it may be time to downgrade to a no-annual-fee card or switch to another card that better fits your lifestyle.
5. Becoming a Co-Signer for Friends
If someone has no credit history or poor credit, they may find themselves needing a co-signer on their credit card application in order to get approved. Credit card co-signers are especially common for student credit cards, where the student may need a parent, relative, or friend over the age of 21 to co-sign the card.
If you have good credit, you may want to be helpful and co-sign a credit card application for a friend. But doing so could potentially wreck your finances and your relationship. As a co-signer, you’re responsible for the payments if your friend falls behind, and you could end up liable for the debt if they don’t pay the balance owed. If your friend misuses their credit card, your own credit score could also be damaged.
If you want to help your friend build their credit, consider these alternatives:
- Add them as an authorized user to your own card: If you have good credit, you can help your friend by adding them as an authorized user to your account. They’ll benefit from your credit history and good habits, but you can set spending limits or not give them access to your card at all. They’ll still improve their credit simply by being added to the account.
- Encourage them to open a secured card: A secured card is a good match for someone with poor credit or no credit. It requires a security deposit which serves as the user’s credit limit. Over time, a secured credit card can help your loved one build their credit score and graduate to a traditional card.
- Find out if they’re eligible for other cards: There are some credit cards that cater to individuals with poor credit or no credit history. They may have added fees or APR, but your friend can use the card to establish a positive credit history and qualify for a card with better rates later on.
6. Ignoring APRs
While you should aim to never carry a balance, you should still pay attention to the annual percentage rate (APR) when signing up for a new credit card. The APR represents the total cost of borrowing money. The higher the APR, the more interest you’ll pay on any outstanding balances.
“If you pay off your balances in full every month, [the] APR won’t affect your purchases,” says Block. “However, if you’re only paying the minimum or just not paying the balance in full, that’s when the interest will start accumulating, and you’ll be paying the interest in addition to the cost of your purchases.”
The average APR for credit cards that were assessed interest was 16.44% as of November 2021, according to data from the Federal Reserve. However, APRs on some cards can be significantly higher. For example, some credit cards for individuals with poor credit can have APRs as high as 36%. That high rate can cause your purchase to cost much more than its sticker price.
If you have to carry a balance, try to pay it off as quickly as possible. Or, you can take advantage of a balance transfer credit card to get 0% APR for an introductory period to save on interest while paying off your debt.
Aside from the APR, be sure you also know what fees your credit card issuer charges, and how to avoid them. A glance at a credit card’s Schumer Box will give you the basic information about the interest rate and fees, but be sure to check the fine print in the terms and conditions as well.
How to Use Your Credit Card Responsibly
Now that you know what not to do with your credit card, you can avoid those common credit card mistakes and learn to use your card responsibly. It’s helpful to think of your credit card as a way to make transactions, not as a way to access cash.
“Don’t get a credit card thinking of it as your emergency fund,” Christensen advises. “Savings funds are for emergencies, not credit cards. Credit cards are for making purchases securely and conveniently.”
If you’re new to credit cards, start small to reap the benefits without overextending yourself.
“Only use it to make a small, single, recurring, fixed monthly purchase such as your cell phone bill, your streaming media service, or a subscription service,” says Christensen. “That way, you won’t overuse it or overextend yourself and will still reap the benefits of generating activity on your card that can count toward your credit score.”