Credit cards can be powerful financial tools when used responsibly, offering convenience, rewards, and building credit history.
However, they can also lead to significant debt and financial troubles if mismanaged.
In this article, we will explore the most common mistakes people make when getting a credit card and how to avoid them.
15 Common Mistakes People Make When Getting a Credit Card
There are 15 mistakes that we will cover in this article. These mistakes include:
- Applying for Too Many Credit Cards at Once
- Ignoring the Fine Print
- Making Only Minimum Payments
- Overspending and Maxing Out the Credit Limit
- Paying Bills Late or Missing Payments
- Closing Old Credit Card Accounts
- Falling for High-Interest Offers
- Not Checking Your Credit Score Regularly
- Co-signing for Someone Without Proper Consideration
- Neglecting to Monitor Account Activity
- Using Credit Card Cash Advances
- Applying for Credit Cards with Annual Fees
- Not Redeeming Rewards Properly
- Relying Solely on Credit Cards for Emergency Funds
- Not Understanding the Impact on Credit Score
Let’s start out by talking about the first mistake – applying for too many credit cards at once.
Mistake 1: Applying for Too Many Credit Cards at Once
One of the most prevalent mistakes among credit card applicants is applying for multiple cards simultaneously.
It can be tempting to chase sign-up bonuses and reward offers, but this practice can have adverse effects on your credit score.
Each credit card application triggers a hard inquiry on your credit report, and multiple inquiries within a short period can signal desperation or financial instability to lenders.
Consequently, your credit score may suffer, potentially making it harder to secure favorable terms on future credit applications.
Example: Sarah, a recent college graduate, excitedly applies for five different credit cards to take advantage of various rewards and cashback offers. Unfortunately, she is unaware of the impact of multiple inquiries on her credit score. As a result, her credit score drops, and she ends up with higher interest rates on her first credit card.
To avoid this mistake, research and compare credit cards before applying.
Focus on cards that align with your financial goals and needs.
Be mindful of your credit score and apply for cards where you have a higher likelihood of approval.
Mistake 2: Ignoring the Fine Print
Credit card agreements come with a myriad of terms and conditions.
Ignoring the fine print is a grave mistake that can lead to unexpected fees and higher costs.
Common fine print elements include the Annual Percentage Rate (APR), grace periods, balance transfer fees, cash advance fees, and late payment penalties.
Failure to understand these terms can result in financial surprises and difficulties in managing debt effectively.
Example: John applies for a credit card without thoroughly reviewing the fine print. Later, he discovers that the card comes with a high APR and substantial balance transfer fees. Consequently, he ends up paying more in interest and fees than he initially anticipated.
To avoid this mistake, take the time to read and comprehend all the terms and conditions before applying for a credit card.
If certain aspects of the agreement are unclear, reach out to the card issuer for clarification.
Mistake 3: Making Only Minimum Payments
Making only the minimum monthly payment on your credit card may seem like a convenient option, especially when money is tight.
However, this approach can lead to long-term debt and considerable interest charges.
Credit card companies calculate the minimum payment to extend the repayment period, maximizing their profit from interest charges.
Example: Maria makes minimum payments on her credit card balances each month. While it relieves her immediate financial burden, she realizes that her debt is growing due to mounting interest. She finds herself trapped in a cycle of increasing debt and struggles to pay off her balance.
To avoid this mistake, strive to pay off the full balance each month.
By doing so, you’ll avoid unnecessary interest charges and take control of your debt more effectively.
Mistake 4: Overspending and Maxing Out the Credit Limit
Having a credit card with a high credit limit can be enticing, but it’s essential to exercise restraint.
Maxing out your credit card or coming close to the limit can harm your credit score and indicate financial irresponsibility to lenders.
Credit utilization, the ratio of credit used to the credit limit, significantly impacts your credit score.
High credit utilization suggests that you may be relying too heavily on credit and struggling to manage your finances.
Example: Michael has a credit card with a $10,000 limit. He uses it to finance expensive purchases beyond his regular expenses, ultimately maxing out the card. His credit score takes a hit, and when he applies for a car loan, he is offered a higher interest rate due to the recent high credit utilization.
To avoid this mistake, keep your credit utilization below 30% of the credit limit.
This practice demonstrates responsible credit management and positively affects your credit score.
Mistake 5: Paying Bills Late or Missing Payments
Timely payment is the backbone of a good credit score.
Missing credit card payments or paying them late can have severe consequences on your financial health.
Late payments not only result in late fees but also negatively impact your credit score. A history of late payments can be a red flag to lenders, making it difficult to secure loans or credit in the future.
Example: David often forgets to pay his credit card bills on time. Consequently, he incurs late fees and his credit score drops significantly. When he applies for a mortgage, he is offered less favorable terms due to his payment history.
To avoid this mistake, set up reminders or automatic payments to ensure you never miss a due date.
Consider enrolling in email or text alerts from your credit card issuer to stay informed about upcoming payments.
Mistake 6: Closing Old Credit Card Accounts
Closing old credit card accounts may seem like a good idea to simplify your financial life, but it can have unintended consequences.
The length of your credit history is an essential factor in determining your credit score. Closing old accounts shortens your credit history, potentially lowering your credit score.
Additionally, older accounts with a positive payment history can improve your creditworthiness.
Example: Emily decides to close her oldest credit card account as she rarely uses it. Unaware of the impact on her credit score, she sees a decline in her score shortly after closing the account. She later realizes that the closure shortened her credit history and resulted in a lower credit score.
To avoid this mistake, keep old credit card accounts open, even if you don’t use them regularly.
Use them responsibly by making small purchases and paying them off promptly.
Mistake 7: Falling for High-Interest Offers
Credit card issuers often lure potential customers with attractive low-interest introductory offers.
While these deals can be tempting, it’s crucial to read the fine print. Many of these offers only last for a limited time, and once the introductory period ends, the interest rates can skyrocket.
Falling for these high-interest offers can lead to unexpected financial strain.
Example: Jessica applies for a credit card that offers a 0% APR for the first 12 months. She uses the card to finance a significant purchase, intending to pay it off within the promotional period. Unfortunately, she misses the deadline, and her interest rate jumps to 25%. She ends up with unexpected high-interest charges.
To avoid this mistake, thoroughly understand the terms and conditions of any promotional offers.
Plan your spending and payments to take full advantage of the promotional period without incurring high-interest charges afterward.
Mistake 8: Not Checking Your Credit Score Regularly
Regularly keeping an eye on your credit score is paramount for maintaining a sound financial standing. Failure to do so may lead to the inadvertent oversight of potential errors or fraudulent activities within your credit report, which could prove detrimental.
Recognizing and rectifying inaccuracies promptly is essential for sustaining a robust credit profile. Additionally, in cases where you encounter issues with inaccurate credit reporting, enlisting the assistance of a qualified inaccurate credit reporting lawyer who specializes in this area can be instrumental in resolving the matter effectively.
For instance, take Robert, who, due to his diligent bill payments, assumes that his credit score is excellent. Little does he know that there’s an erroneous report impacting his credit score negatively. It’s only when he applies for a loan that he’s startled to discover that he doesn’t qualify for the best interest rates.
To steer clear of this blunder, make it a practice to access your credit report from each of the three major credit bureaus – Experian, Equifax, and TransUnion – at least once a year. To stay well-informed about any fluctuations in your credit score, consider utilizing reputable credit monitoring services.
Mistake 9: Co-signing for Someone Without Proper Consideration
Co-signing for a credit card or loan means taking on shared responsibility for the debt.
While you may be doing someone a favor by co-signing, it’s essential to consider the potential risks. If the primary borrower defaults on payments, the co-signer is equally liable for the debt.
Co-signing without proper consideration can lead to financial strain and damage relationships.
For example, Mike co-signs a credit card for his friend Jack, who has a limited credit history. Unfortunately, Jack struggles to manage his finances, and the credit card accumulates significant debt. Mike is left responsible for the debt, putting a strain on their friendship.
To avoid this mistake, carefully evaluate the financial responsibility and trustworthiness of the person seeking co-signing assistance.
Only co-sign if you are fully prepared to assume the responsibility of the debt if the primary borrower cannot pay.
Mistake 10: Neglecting to Monitor Account Activity
Regularly reviewing your credit card statements is essential for detecting fraudulent activity and unauthorized charges.
Neglecting to monitor account activity can result in delayed detection of potential issues, leading to greater financial losses.
For example, Anna fails to check her credit card statements regularly. After several months, she discovers several unauthorized charges on her account, but because she didn’t report them promptly, she is held responsible for the fraudulent expenses.
To avoid this mistake, examine your credit card statements thoroughly each month.
Report any suspicious activity to your credit card issuer immediately.
Mistake 11: Using Credit Card Cash Advances
Credit card cash advances may seem like a convenient way to access quick cash, but they come with hefty fees and high-interest rates.
Unlike regular purchases, cash advances usually start accruing interest from the moment you withdraw the money.
As a result, using credit card cash advances can be an expensive way to borrow funds.
For example, James uses his credit card to obtain a cash advance for an emergency car repair. He withdraws $500, not realizing that the cash advance fee is 5%, and the interest rate is significantly higher than his regular APR. He ends up paying an extra $40 in fees and interest for the advance.
To avoid this mistake, explore other borrowing options, such as personal loans or lines of credit, before resorting to credit card cash advances.
These alternatives often offer lower interest rates and fees.
Mistake 12: Applying for Credit Cards with Annual Fees
While some credit cards offer valuable rewards and benefits, they may come with annual fees.
Applying for credit cards with annual fees can be wasteful if the perks don’t align with your spending habits. Paying annual fees for benefits you don’t fully utilize can erode the value of the rewards.
For example, Alex applies for a premium credit card that offers exclusive travel benefits and rewards. However, he rarely travels and seldom takes advantage of the perks. The annual fee of $150 ends up outweighing the benefits he receives, making the card less valuable to him.
To avoid this mistake, consider your spending habits and lifestyle before applying for a credit card with an annual fee.
Opt for cards that provide rewards and benefits that align with your preferences.
Mistake 13: Not Redeeming Rewards Properly
Credit card rewards can be enticing, but failing to redeem them effectively, including not knowing how to use credit card points to your advantage, can lead to missed opportunities.
Many rewards programs have expiration dates or restrictions on how they can be redeemed. Neglecting to use your earned points or cashback effectively means you are not maximizing the value of your rewards.
For example, Emily accumulates a substantial amount of cashback rewards on her credit card but forgets to redeem them before they expire. She loses out on hundreds of dollars in cashback that could have been used to offset her next credit card statement.
To avoid this mistake, familiarize yourself with the rewards program associated with your credit card.
Stay informed about any expiration dates and redemption options. Consider setting reminders to ensure you make the most of your earned rewards.
Mistake 14: Relying Solely on Credit Cards for Emergency Funds
Credit cards are not a reliable substitute for an emergency fund.
Relying solely on credit cards during financial emergencies can lead to overwhelming debt. Credit card debt accumulates interest over time, making it more challenging to recover financially.
Example: Julia faces a sudden medical emergency and uses her credit card to cover the expenses. As she struggles to pay off the debt, additional unexpected expenses arise, leading to a cycle of credit card dependency and financial stress.
To avoid this mistake, build a separate emergency fund that can cover three to six months’ worth of living expenses.
Having cash reserves can help you weather unexpected financial challenges without accumulating high-interest credit card debt.
15. Not Understanding the Impact on Credit Score
Every credit card application and usage affects your credit score.
Failing to comprehend how credit utilization, payment history, and new credit inquiries influence your score can lead to unintended consequences.
For example, Mark opens several new credit card accounts in a short period to take advantage of various promotions. Unaware that each application triggers a hard inquiry, his credit score drops significantly, making it challenging to secure favorable terms on future loans.
To avoid this mistake, educate yourself about how credit scores work and how your financial decisions impact them.
Regularly check your credit report to ensure accuracy and identify areas for improvement.
Conclusion
Getting a credit card can be a smart financial move when done wisely.
By avoiding these common mistakes, you can make the most of your credit cards, build a strong credit history, and enhance your overall financial well-being.