Getting involved with credit cards without some guidance can sometimes feel like jumping into the deep end of the pool without knowing how to swim -- sink or swim, your (financial) life is on the line. Since credit scores and history are virtually ingrained in every American today, we are seldom presented with information that can make the tasks less perilous. Below is a simple list of mistakes to avoid with your credit cards.
1) You should avoid overusing your credit card. Only put charges onto your card that you know you can pay off at the end of the month. Consumers too often get into the dangerous mentality that their credit limit is equal to their spending budget. As soon as the two don't match up, and you spend beyond what you can afford, you will be forced to keep a rolling balance on your card and pay interest on it. There is nothing wrong with letting your credit card sit in your wallet for a month or two, without a balance. This will not lower your credit score.
2) You should avoid paying interest. Over the last few years, more and more credit cards have begun to provide consumers long, '0 percent APR on balance transfers' offers. If you find yourself trying to dig out of credit card debt, save on interest costs by moving your balance over to one of these balance transfer credit cards. You will usually have to pay a 3 percent transfer, but as long as you take 3+ months to pay that balance off, the total savings in interest will make it worthwhile. As an example, transferring $15,000 from a 13.02 percent APR card to a balance transfer credit card will save you $458 over 6 months -- this is assuming you were making monthly payments of $500 a month. Contrary to popular belief, you also do not have to pay interest and carry a balance in order to build credit! This is one of the most common misconceptions around, and it causes a lot of people to unnecessarily carry a balance month to month.
3) You should avoid paying an annual fee (unless it makes sense to). Credit cards with annual fees are generally meant for those whose spending will earn them rewards to cover the card's cost. To know if you fall into this category, you can look up the rewards rate of a credit card and multiply it by the average amount you spend in a year. If the product is close to or less than the annual fee, you should generally avoid that card. Most cash back credit cards come with no annual fee and generally fit the needs of most consumers.
4) You should avoid taking out cash advances (unless... no, never!). Cash advance APR tends to hover around 24 percent -- as opposed to the 13 percent to 15 percent we see with regular purchase APR. That is made extra deadly when you consider how your bank handles your credit card payments. Any money you put towards your balance is first applied to the parts of your bill that are accumulating lower APR. That means unless you make a full payment, your cash advance is guaranteed to accumulate that high interest. On top of the APR, cash advances will also, on average, charge you a 4 percent fee of the total amount you withdraw. This fee will be added to the 'cash advance' fee you will have to pay off at the higher APR.
Research indicates that a majority of consumers spend just a few minutes or less researching credit cards before applying for one. Odds are that if you're reading this, you're ahead of the curve. The last bit of advice I can give is to never let yourself think you know enough about credit cards. Always seek to educate yourself about new offers and card policies that can benefit you, or simply to avoid being taken advantage of.
