10 Credit Card Mistakes You Didn’t Know You Were Making. How To Avoid Them
You may be familiar with some basics of credit card usage – make payments on time and stay within your credit limit. But, there are some lesser-known mistakes that even the most prudent users can make
In today's digital age, credit cards are an inseparable part of personal finance. Offering convenience and rewards, these nifty tools have transformed the way we transact and can improve your financial health when used responsibly. On the other hand, misusing your credit card can lead to financial distress. You may be familiar with some basics of credit card usage – make payments on time and stay within your credit limit. But, there are some lesser-known mistakes that even the most prudent users can make. Let's find out what these mistakes are so you can avoid them.
Taking a cash advance
A cash advance lets you withdraw cash using a credit card, which can be useful in emergencies. However, it comes with higher costs, with interest rates much higher than for regular purchases, which starts immediately after withdrawal. Instead, you can consider using savings, borrowing from friends or family, or taking a personal loan.
Using your card for everyday purchases
Overspending is often seen among credit card users because the money is extended as a credit without being debited from your account. Many cardholders tend to use their credit card or small, everyday purchases, which, if not monitored, can accumulate over time into a larger debt. To avoid this, use petty cash or your debit card for smaller purchases to keep track of the money you’re spending and curb excess expenditure.
Using your card for non-essential purchases during financial distress
When you’re faced with a cash crunch, using your credit card to pay for non-essential expenses may seem harmless. But, this can add to your existing debt and put you in a tough spot when the time comes to repay. Avoid this by only assessing and culling all non-essential expenses. If you need to, explore restructuring your debt or seek financial assistance.
Not setting up alerts
If you have multiple payments to keep track of, there’s a higher chance of you missing an odd payment here or there. Banking apps have evolved and now offer a range of services accessible from your smartphone or desktop. One such service is to set reminders or receive alerts for various activities, such as transactions, upcoming payments, reaching a spending threshold, and unauthorised activity in your account. Utilise these alerts to manage your card better.
Cancelling old credit cards
The length of your credit history and credit utilisation ratio can impact your credit score. When you close an old credit card, your overall credit limit reduces and can drive up your credit utilisation ratio. It also reduces the age of your credit accounts and these two factors can impact your credit score negatively. So, don’t close or cancel an old credit card and use it, even if sparingly, to keep it active.
Making high-value spends on your card before applying for a loan
When you apply for a loan, lenders will consider your current debt levels. High-value purchases right before applying for a loan can drive up your debt-to-income ratio, which could affect your chances of loan approval. So, avoid making expensive purchases before applying for a loan.
Using credit cards for major medical expenses
Credit cards, with their convenience, may seem like an easy option to pay for expensive medical treatments. However, if you are unable to pay off the bill amount on time, the high interest rate levied on your outstanding bill can cripple you financially. Instead, explore solutions like medical insurance policies that are meant specifically to cover a wide range of medical expenses and can save you from unnecessary debt.
Opting for balance transfers without a repayment strategy
Balance transfer are a useful feature that allows you to sift your high-interest credit card debt to a lower-interest card. During the introductory period, you may not have to pay a fee, but this won’t be the case once this offer period ends. So, with the charges applicable, you may be adding to your existing debt.
Not updating your contact details
If you have moved houses but haven’t updated your bank, you can miss out on physical notifications like card statements, or even receiving new credit cards. Remember to update your bank about the change in details. This will ensure you don’t miss payments, and also protect your account details and financial information from falling into the wrong hands.
Not reading the fine print
Like all banking products, credit cards too come with a lot of fine print that dictates the terms of use, interest rates, cardholder’s liability, penalties, and fees, among other things. If you don’t read this fine print, you may end up with charges that you weren’t aware of. So, review the terms and conditions of the card before you sign up for it to prevent surprises.
There are some lesser-known mistakes that cardholders may commit which may cost them dearly. When it comes to best practices, first and foremost, pay your bills on time and in full. Read your credit card statement carefully to spot discrepancies or errors. Be aware of the fees applicable to your card, as well as its rewards program. Lastly, don’t share your sensitive financial information with anyone to keep yourself safe from fraud. Avoid these mistakes to keep your finances healthy.
The author is the CEO of BankBazaar.com. This article has been published as part of a special arrangement with BankBazaar.
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