A tried and tested way to build credit and pay for expenses, credit cards will never run out of uses. But, it is indeed a tool to be used with abundant caution. As tried and tested as it may be, it is not fool proof and just like any other credit mechanism, it comes with the responsibility of paying the amount overspent, i.e, the ‘credit’ the bank has lent to you via your credit card. If misused, they can damage your credit score apart from landing you with a heaping pile of costs.
It’s not too difficult to get into the habit of using your credit card the right way. This article lists down 10 common mistakes that credit card holders often make and really need to avoid and will also give you a few tips to help you stay on top of your finances! Note that these mistakes are common to all types of credit cards and users.
- Carrying a balance month-to-month
Probably one of the most common things you’ll hear from an amateur or a new credit card user is that carrying your credit card balance month to month is likely to improve your credit score and we’re sorry to burst your bubble, friends but this isn’t true at all! Carrying your credit balance month to month tends to harm your credit score in addition to costing you extra money. On most credit cards, be it there are quite high credit card interest rates that are charged when the balance is carried by the customer.
The logic behind this is pretty simple- if you carry a balance on your card, it would lead to a higher credit utilization rate, which essentially is the amount of debt in comparison to the available amount of credit you have. Experts have time and again advised users against keeping such a balance as the lower your utilization rate, the better it is. People who know the ins and outs of their credit card, never maintain a balance from month to month.
- Only making minimum payments
We would like to point out in the very beginning that there is a huge difference between making at least the minimum payments and making only the minimum payments. The credit card holder should always make at least the minimum payments but should strive to make the full payments on their card/cards to ensure that they do not fall into a debt trap and rack up high-interest charges on that plastic money, which otherwise could have been avoided.
If you continue to pay only the minimum payment on your credit card, it can add months or even years to the time required for you to pay off that debt. Probably one of the smartest things to do s to have a payment plan ready before using the credit card. It is also very important to make consistent and timely payments on your credit card balances.
- Missing a payment
Another thing that can easily bring down your credit score is late or missed payments. Usually, banks have a waiting period of 30 days, beyond which if the payment remains due, it’s reported to the credit agencies and resultantly, your credit score reduces. The later you are in paying off the amounts due to the bank, the bigger the fall in your score.
However, if you pay within that 30-day waiting period, your credit score most likely wouldn’t witness a downfall. But, you’ll still have to incur late fees or high-interest charges owing to the default. Therefore, what is advisable is to set up an autopay or give your bank standing instructions to deduct the designated amount so that payments are always made on time. Another thing that can be done is to simply set reminders and be on the lookout for email notifications from your bank for your payment.
- Neglecting to review your billing statement
As important as it is to make timely payments, it is equally important to go through your monthly billing statement and review all the transactions listed on the bill. While doing this, you want to check if everything on the bill is accurate rightly charged. Card frauds are nothing new and neither are reporting errors so, it’s better to make it a habit to review your monthly statement as and when it arrives rather than regretting not doing it when you discover a fraud or a wrongly reported transaction. Alternatively, you could also keep a weekly check on your transactions via internet banking and that would break down the otherwise slightly lengthy task of going through the monthly statement.
- Not knowing your APR and applicable fees
Say you apply for a credit card and your application is approved. You would then receive an agreement that contains a few terms and conditions and information about the payments to be made, deadlines, and so on. While it is incredibly important and an un-skippable step to go through the entire agreement, in cases where it isn’t possible to do the same, it is a must to go through the various types of payments that would be levied, the deadlines for your payments and other charges. Typically, you have to be looking out for terms such as annual fees, late payment fees, foreign transaction fees, balance-transfer fees applicable on your balance transfer credit card, purchase APR, the balance transfer APR and the like.
- Taking out a cash advance
This one is probably something that every credit card user will warn you about! Perhaps one of the diciest things to do with your cash advance credit card is to take a cash advance on it. A hefty interest rate is charged on this cash advance and there’s no grace period provided by the bank as you would usually get for your regular purchases. You’re also very likely to incur a cash advance fee in addition to the interest rates.
- Don’t purchase gold
With the low cost of gold and gold jewelry in the United Arab Emirates, it can get very tempting to spend on gold with your credit card. But, purchasing gold on your credit card is not a good idea! It would increase the amount of debt that you’d be required to pay to the bank for the purchase but not only that, even the jewelry shops charge extra if you’re paying by card, so the overall cost of this transaction would come out to be a lot for you.
- Maxing out your credit card
It is never advisable to use the maximum or the entire limit on your credit card as your utilization rate would drastically increase, lowering your credit score. like we’ve already mentioned, the lower your utilization rate, the better it is! So, it is advisable to not stay too close to the charging limit each month and if you are, then you could request a credit increase from your bank.
- Applying for new credit cards too often
While this may, prima facie, sound harmless to you, the rationale behind this suggestion is simple- every time you apply for a new credit card, a new inquiry is generated, which appears on your credit report. The more inquiries, the more the possible lenders would be hesitant to lend to you when needed. Only apply for a new credit card when needed, ideally, restrict it to not more than one in every six months. Although, if it’s less than that, it works great too! Credit card comparison is usually advised before finally applying for a particular card and it is also advisable to compare credit card offers by banks.
- Closing a credit card
One of the factors that affect your credit score is the average length of time you’ve had the card for. Upon closing your credit card, the average length of your credit history is bound to get affected. For instance, you have two credit cards- one is 5 years old and one is 2 years old. You decide to close the 5-year-old card, which decreases your credit history to only 2 years.
So, if at all you have to close a credit card, make sure it’s not the oldest one you have, as that can result in your credit history being affected badly.
It doesn’t matter if you’re a fresh or a new credit card user or an experienced one. These mistakes have been made by many over the years and now, you can avoid them by paying more attention to the way you use your credit card and carefully considering all the dos and don’ts before buying it.
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