Americans love credit cards, and rightfully so. You can make purchases without carrying cash and stretch payments out over several months. Credit cards can provide rewards and benefits that save you money. It’s a shame, then, when consumers make credit card mistakes. Here are five errors to avoid and how to avoid them.
Almost all credit cards provide a grace period of at least 21 days between the end of a billing cycle (when your statement is printed) and the payment due date. You avoid interest charges by paying the total balance by the due date. Any unpaid balances accrue and compound interest daily until paid. Some folks don’t realize that the grace period on new purchases is suspended when you carry a balance past the due date, and you must close the balance before the grace period returns. Avoid high interest charges by paying your bill in full and on time.
Credit card companies love when you make minimum payments. It can be tempting to pay one $15 or $25 of your credit card bill when money is tight. As explained above, this causes interest charges to pile up and your grace period to go on vacation. Emergencies can occur occasionally, but if you regularly pay only small portions of your monthly credit card bill, your spending could be out of control. Paying with real money from your checking account (with a debit card) often helps to deter unnecessary spending.
Most credit cards pay rewards, in the form of points, miles, or cash back, on eligible purchases. That’s great, as long as you aren’t tempted to buy things just to grab more rewards. Most rewards are worth 1% to 5% of your purchase amounts, while credit cards charge up to 36% interest on unpaid balances. Unless you have no problem repaying spending sprees, buying stuff just for rewards could lead to big credit card bills that you can’t pay in full by the due date. Even if you can pay the entire amount, the rewards are seldom worth the money spent on items you don’t need. Instead, use that extra money to pay down debt, increase savings, and invest for retirement.
The APR on credit card cash advances usually exceeds 25%, and there’s a 5% fee per transaction. Interest accrues from Day 1 — cash advances have no grace period. Save cash advances for emergencies when you have no better sources of funds.
You could be paying an annual fee. You may be paying a fee on foreign transactions. You most certainly will pay a fee for late payments, cash advances, and balance transfers. If you have bad credit, your card may also charge fees for signing up and monthly maintenance. Credit cards must disclose fees in a standard format called a Schumer Box. Read the box before applying for a card, and choose cards that minimize costs. You could save hundreds per year.