When used correctly, credit cards can provide a variety of benefits. Some of these benefits include convenience, rewards and security. Unfortunately, many people do not use their credit cards responsibly and it ends up costing them dearly. If you want your credit cards to be advantageous to you rather than a burden, here are some common mistakes that you should avoid.
Closing Accounts too Quickly
Part of your overall credit score is determined by how much credit that you have available to you. When you close one or several of your credit accounts, it’s going to impact your credit score negatively. This is going to a disadvantage if you plan on financing a mortgage, a car or some other large purchase in the near future. Instead of closing the accounts, simply cut up the cards so you can’t use them. You’ll still have the credit available to you on paper, but you won’t be able to use the card to charge stuff on it.
Only Paying the Minimum Each Month
This is possibly one of the most common mistakes people make with credit cards. If you are only paying the minimum, it is going to take years to pay off your cards. Here’s an example: You have a card with a balance of $10,000 on it. At a conservative interest rate of 10 percent with a minimum payment of 2 percent, you will pay $200 each month on the card. At this rate, it will take you more than three decades to pay off the card. That’s like a mortgage! In addition to that, you’ll be paying about $25,000 overall by the time the card is paid off.
Paying for Prepaid Credit Cards
With all of the competition and choices out there on the market these days, there is simply no reason to pay high monthly rates for a prepaid credit card. Most cards charge a fee, but they also give you options for avoiding the fees, such as waiving the monthly charge if you have a direct deposit put onto your card at least once a month. If the prepaid card that you are considering or if you already have one that charges a high monthly fee, look for another one and save money.
Carrying a Balance on a Rewards Card
Many credit card companies these days offer a variety of rewards to entice you to choose their card. These rewards can come in the form of cash back on purchases, point or even airline miles. But in order to be able to offer these rewards, the company has to charger interest rates that are higher than other cards. As a result, carrying a balance on your rewards cards can be a costly mistake. Pay off your rewards cards each month or the benefits that they offer will be far outweighed by the higher interest rate that you’ll be charged.
If you are going to use credit cards, it is best to use them to your advantage. By avoiding these costly mistakes described above, you can reap the benefits that credit cards have to offer and minimize the disadvantages that can happen. Can you think of any other costly mistakes that people make with credit cards?