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Whether you’re in a financial crunch or just lack a second Ferrari, credit card offers landing in your mailbox might look like an answer to a prayer.
Don’t succumb to temptation, says Cate Williams, vice president of financial literacy for Money Management International in Chicago.
“The first thing consumers need to do is walk from their mailbox to their shredder,” says Williams. “A new credit card might give you that sparkling feeling for about 24 hours, but as a way to clean up your finances, borrowing money to pay back other money is not a solution.”
Experts’ advice can steer you away from the top 10 credit card mistakes.
1. Getting too many Bypass the shredder and you could make one of the most common credit card blunders by collecting too many credit cards.
“Ask yourself,” says Williams, “ ‘Do I need another credit card?’ Probably 95 percent of us don’t need another one to keep in the sock drawer or in the little metal box in the kitchen.”
Howard S. Dvorkin, founder and president of Consolidated Credit Counseling Services, a nonprofit debt management company in Fort Lauderdale, Fla., agrees. “The worst mistake is that people don’t know when to stop. Too many credit cards is not a good thing.”
Even if the cards have zero balances, multiple open accounts could cause a lender to question what could happen if the account holder gives in to temptation and maxes out on all that plastic.
2. Misunderstanding introductory rates But, you argue, that new card will help you manage your money better because you can transfer other balances to a no-interest account. Welcome to credit card mistake No. 2: being misled by introductory rates.
“People don’t look at what the rate’s going to be once the teaser is over,” says Daniel Wishnatsky, certified financial planner and owner of Special Kids Financial in Phoenix. “The assumption is that it’s going to be a reasonable rate. But with these particular loans, it’s not unusual for it to go up to 18 to 20 percent. They’re surprised six months later when it expires. But if they’d done their homework, they wouldn’t be.”
3. Not reading the fine print That homework is reading the offer’s fine print. Not doing so is credit card blunder No. 3.
That tiny text insert is where you’ll discover when the zero-percent or very l ow interest rate expires. It’s also how you can find out about any balance transfer fees, as well as any offer limitations. In most cases, the introductory rate applies only to balance transfer amounts or new purchases for a certain period of time, says June A. Schroeder, a CFP with Liberty Financial Group Inc. in Elm Grove, Wis., a private financial planning and advisory firm.
4. Choosing a card for the wrong reasons You might be tempted to ignore the fine print because the card has other attractions, such as a rebate or rewards program. Don’t, or you’ll make credit card mistake No. 4: choosing a card for the wrong reasons.
“Credit card granters are not a consumer’s friend. It is a business,” says Dvorkin. “They don’t know what’s right for you. Their job is to extract as much money from you as they can. Your job is to not let that happen. People need to go through and find a card that’s right for them. There’s every sort of card out there — points, cash back, donations to your college.”
5. Not rate shopping Look for the best possible interest rate. Not shopping around is credit card mistake No. 5.
It’s especially important to note the rate on unsolicited offers. If you’re struggling financially, you’re not likely to get the most favorable rates or terms. You’ll be paying higher interest rates. So comparison shop for a credit card.
6. Making minimum payments OK. You do need another card. You read the fine print, you completely understand the terms and you got a competitive rate. But even after choosing the perfect credit card, people still make mistakes, such as No. 6 on our list, making minimum-only payments.
“Credit cards are not a form of supplemental income,” says Dvorkin. “They’re for convenience, and should be paid off at the end of every month. Paying the minimum is not going to get you anywhere. It’s going to get you in trouble, that’s where it’s going to get you.”
And it’s going to get you into trouble for a long, long time. “People don’t realize how difficult it is to pay off loans at a high rate,” says Wishnatsky. “You’re going to be paying it for your next three lifetimes.”
CreditCards.com’s calculator can show how long it will take to pay off a bill if you send only the minimum each month.
7. Paying your bill late Making late payments, blunder No. 7, is better than not paying at all, but not by much. Not only will you face a late-payment charge, which could be higher than your minimum payment, your tardiness will show up on your credit report, damage your FICO score and make it harder to get better terms for future loans and accounts.
Check your account statement for the due date and make sure you send your check in plenty of time. But the date alone isn’t enough, says Liberty Financial’s Schroeder. Some companies have cutoff times. If your check arrives on the 22nd as required, but in the afternoon mail, your payment is counted as late because your account terms called for payment by 9 a.m. that day.
If you’ve set up an automatic payment via your bank, make sure the time and date are taken into account, says Schroeder. And find out your bank’s payment policy when the due date falls on a weekend or holiday.
8. Ignoring your monthly statement You can avoid late payments by checking your credit card statement. Not doing so is mistake No. 8. Checking your statement will help you pay your bill promptly, as well as allow you to make sure that the charges on it are correct. “In these days of ID theft, you need to check your bills religiously,” says Schroeder. And you need to do so as soon as the statement arrives. If you wait too long to dispute a charge, says Schroeder, “you’re essentially accepting it.”
9. Exceeding your credit limit Checking your statements also can keep you from exceeding your credit limit, mistake No. 9. “If you’re near the top of your credit limit, try really hard to pay in cash for subsequent purchases or get an increased credit line,” says Schroeder. “If you don’t, you’ll get over-the-limit charges, which are costly and look bad on your credit report.”
10. Buying things you don’t need Careful statement examination also could prevent the 10th credit card blunder, using plastic to purchase things you don’t need.”Go over your credit card bills every month and you’ll be amazed at the number of items that, upon reflection, you could have done without,” says Wishnatsky. “It’s surprising how many purchases we make that we think are needs, but are impulse buys.”
The Phoenix financial planner tells his clients who are considering a significant purchase to wait 48 hours, if at all possible. “If you still want it, wait another 48 hours,” Wishnatsky says. “Then if you have to get it, then get it.”
Also use your statements to help you create a budget. Wishnatsky realizes many people cringe at the “B” word, but he says control of your spending and your credit card usage doesn’t have to be a way to deprive yourself. Instead, it can be a way to make things happen in financially positive ways.
“Once you get control, even to a degree, it frees you from this constant money worry,” says Wishnatsky. “You might find there are things that you can actually end up having if you just have a plan, if you get your financial desires in tune with your financial resources.”
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