After obtaining a credit card, it is important to take measures to use this newly obtained credit wisely. Having a credit card isn’t what gets some people in trouble – it’s the way they use it that does. Issues like overspending are common, as are getting caught up with rewards while not paying attention to interest on outstanding balances.
Here are a few concerns to be aware of before swiping your new card and tips on how to use all of your credit cards wisely.
Top 10 Common Credit Card Accountholder Issues
1. Getting too many credit cards
The temptation to receive a sign-up bonus or new rewards opportunities can lead a person to obtain many credit cards. There are very few times when having a handful of cards lying around will benefit the business or consumer. Even if the credit cards are left with a zero balance, the lender may wonder why so many are open, and what could happen if the consumer were to max them all out.
Some credit card issuers periodically review a cardholder’s credit report and score to look at details such as these. If something seems off, like having too many cards, or spending too much on them – which affects the credit card’s utilization ratio – the card issuer could make changes to the cardholder’s terms.
2. Misunderstanding introductory APRs
The 6-21 months of a zero percent interest rate on purchases or balances transfers may sound appealing, and it may even provide a good rational for opening a new credit card to transfer over the balance of another account to save on interest charges.
However, a common mistake is not planning for what happens when this introductory period is over. Often, when the introductory annual percentage rate (APR) offer expires, it jumps up significantly, putting the consumer in an even worse spot than before if the balances aren’t paid in full by the end of the promotional period.
Furthermore, some promotional offers only include an introductory rate on balance transfers and not purchases. If the user moves over a significant balance and then also makes purchases, those purchases will be at the regular APR. When the cardholder makes the payment each month, that will oftentimes be applied to the balance transfer balance first, leaving the purchases accruing interest.
Even if the cardholder pays the credit card company for the full amount of purchases that month, those purchases will continue to accrue interest month after month until the entire balance transfer balance has been paid off.
3. Not reading the fine print
Within the fine print, you’ll find what the interest rate the card changes to after the introductory period has ended, as well as balance transfer fees, annual fee, grace periods, and all other relevant APR, fee and usage information.
Be sure to take a close look at these terms before accepting the new credit card. For example, some credit cards will offer no annual fee in year one but could surprise you by climbing to more than $100/yr. from year two on.
4. Choosing a card for the wrong reasons
You’ve always wanted to go to Hawaii, and that free round-trip ticket offered will get it done! You apply and get approved. However, there is a spending requirement within the first three months of obtaining the card that you must hit in order to receive that trip and you cannot truly repay in a timely fashion.
This could spell disaster, and in an expensive way. When you choose credit cards for the wrong reasons it can often lead to people signing up for a card they don’t need or cannot afford. The credit card company’s job is not to match each consumer with the best card for their needs, but rather to issue more cards that make it money.
Be wary of the gimmicks involved with getting you signed up. Many of them can definitely benefit some people, but oftentimes you could end up spending money you don’t have on things you don’t need or paying a lot more in interest than you would have with another credit card just to get that “free” trip.
5. Not interest rate shopping
When an envelope arrives at your door with ‘pre-approved’ written on the front, and two airline tickets that could be yours, it is tempting to just accept the offer. Most of these unsolicited credit offers will not have the best available interest rates and there’s a good chance you will pay for the flight in the long run through various service fees anyway.
6. Only making minimum payments
Carrying a balance on a credit card is the main way the companies issuing them make money. It’s also the way that consumers get in financial trouble. Credit cards should not be used as supplemental income, but merely as a convenience tool that gets paid off every month. Paying only the minimum amount due, because that’s all that is required, is the quickest way to find yourself in a costly cycle of debt.
7. Paying your bill late
Not only will you face a late-payment charge, but it could also increase your regular annual percentage rate, and your tardiness will eventually show up on your credit report and drop your score significantly. This can be a serious hit to your credit score and make it harder to get better terms on future loans or line-of-credit accounts.
8. Ignoring your monthly statement
By not carefully reviewing each month’s bill, you may miss the opportunity to monitor your spending habits well, and you could possibly be ignoring someone else too. In the days of ID theft, it’s imperative to check each statement closely to make sure there are no unusual charges and that you aren’t overdoing it with your own spending.
9. Exceeding the credit limit
Not all cards will be declined if they have reached their credit limit. Many will allow charges to go through only to later hit the cardholder with over-limit fees. Considering the previous tip, regularly checking your statement, and knowing your credit ceiling should help you avoid going over your limit.
10. Buying things you don’t need
Although it is the most basic rule, it’s one that is perhaps most often broken. Credit cards offer a convenience that can create bad habits in spending. The tried and tested rule about waiting 48 hours to purchase something large can greatly reduce impulse buys or other purchases that, upon reflection, weren’t all that necessary.
If you need added self-control, some suggest freezing the credit card in ice, so when you are tempted to make that purchase you have to wait until it melts prior to using it again. Avoiding overspending starts with having a realistic budget each month, and knowing what you can and cannot afford, despite what your credit limit may be.
Final Thoughts on Using Credit Cards Wisely
These are 10 great ways for you to choose and use your credit cards wisely, but you also need to be wary of fraudsters. Learning how to shield yourself from bad actors and taking other precautions is nearly as important for your debt, credit, and credit card’s safety.
