As a full-fledged millennial I must admit that I seldom use cash. Sure I have some stashed away for the occasional vendor that doesn’t accept cards, but these days even our local farmers market is equipped to take credit cards. As credit cards usurp cash as the predominate payment method, we should stay aware of the pitfalls that can often accompany them. Here are five of the top mistakes you can make with your credit cards.
Not Paying Your Monthly Minimums
Ideally if you’re using a credit card, you are spending only what you can afford and you are paying the balance off at the end of each month. Realistically, that is not always the case. If you are in a situation where you have accumulated more credit card debt than you can afford to pay off at the end of the month, the least you should be doing is making your monthly minimum payments. If you have to sell shoes on eBay to meet the monthly minimum, then do it. If you have to babysit for a friend’s child on a Friday night, do it. You need to meet those minimums. Missing minimum payments is an expensive business. Not only do you face a late fee from the credit card company, but they also can raise your interest rate as a result. On a larger scale, it can also negatively impact your credit score and make it more expensive (or impossible) to get a home or auto loan.
If you are a forgetful person set your credit card minimums to autopay. You can always go in later and pay an additional amount towards your debt, but there’s no reason you should ever miss a payment because you forgot. Anything extra you can put towards your debt is a plus. By only paying the minimums your debt could take years to be extinguished. (Believe me, these credit card companies know what they’re doing by setting the minimums so low.) However, if there’s only one thing you take away from this article, let it be to pay your monthly minimums on time.
Putting Too Much Emphasis on Rewards
There are so many different credit cards to choose from these days, and each has its own unique rewards program. But rewards are only worth it if you get more out of it than you had to give up to get it. For example, if you earn travel rewards on your card, but you almost never get to travel, you probably have the wrong card. You need to choose a card whose benefits you will actually use. Cash back is always a safe bet if your spending tends to be pretty general.
The bigger issue with credit cards that offer rewards is that it often tempts people to spend with their credit card while not keeping their actual bank balance in mind. If you are going to use these cards, it should only be in the interest of paying them off each month. If you aren’t able to pay it off at the end of each month, you are going to owe interest that will more than offset any potential rewards you might have gotten. If that’s the case for you, stay away!
Not Negotiating Your Interest Rates
Did you know that the interest rates on credit cards are negotiable? Just like any other business, your credit card company wants to keep you as a client. Next time you receive one of those annoying credit card ads in the mail telling you about a 0% introductory rate, call your current credit card company and let them know that you would like to stay with them, but you have received a better offer and ask if they would be willing to match the offer. Often, you’ll be surprised at the answer. The best time to call is usually when you’ve built up a longer history or regular minimum payments so you can demonstrate that you are a valuable customer. Additionally, even if you have zero credit card debt, you should call now to negotiate your rates. It’s an easier sell to the credit card company, and you never know when it might come in handy.
Having Too Few Credit Cards
It’s helpful to have a couple of credit cards, but not too many. How’s that for vague? Your credit score is determined off of a couple of factors. Besides your payment history, it will also consider your available credit versus the amount of debt outstanding or in financial terms, your credit utilization ratio. For instance, say you have three credit cards, and each has a spending limit of $5,000. You have spent $1,000 on each and therefor have total credit available totaling $12,000. Your credit utilization ratio is 20% ($3,000 of debt divided by $15,000 total credit limit). A 20% ratio is small enough that it shouldn’t negatively impact your credit score. However, if you have only one card with a $5,000 limit and you put all $3,000 of debt on that one card, you now have a 60% ratio which is significantly higher and could be a negative factor affecting your credit score. In both examples, your debt is the same, but your overall limit makes a difference. The best way to fix this is by requesting that your current credit card companies increase your spending limit. You don’t actually want to spend more, but you do want to use it as a way to easily improve your credit score. Alternatively, opening another credit card that you don’t use could help your ratio, just watch out for annual fees. You don’t want your credit card to cost you money even when you’re not using it.
Never Checking Your Credit History
Lastly, never checking your credit history is a big mistake. Especially in the wake of the Equifax breach, the best thing you can do is to stay abreast of any changes in your credit report. Your report is available for free annually via www.annualcreditreport.com and it will show you if there are any credit cards or even mortgages that were taken out in your name. It’s actually surprisingly common for such things to happen, or even for a friend or family member to use your identity to secure a loan for themselves. If you spot a problem you can have it corrected, but if you’re not even aware it’s happening you could potentially be hurt financially with no available recourse.
With that said, take a look at your credit cards. Is there something on this list that you could tackle today? Could you call your credit card company to renegotiate your rate? Could you set up monthly minimum autopayments? Any little step can bring you that much closer to financial well-being.
Written By: Lindsay Dell Cook
Lindsay Dell Cook is a CPA, finance writer, and founder of Budget Babble. She lives in Philadelphia with her uber supportive husband and adorable daughter. When she's not working, she enjoys spending time with her family, taking their lovable mutt for walks, or reading a good book while buried under a pile of cats.