5 terrible credit card mistakes

By Vanessa Tripodi

There are plenty of people who will tell you that the number one mistake any credit card holder can make is to use their credit cards. While there are plenty of reasons not to have credit cards, and just as many ways those credit cards can get you into serious financial trouble, once you know how to avoid the following mistakes, you will do just fine.

1. Not knowing enough about your credit cards. In most cases, no one likes a know-it-all, but in the case of your credit card spending habits, that's exactly what you should be. The only way you can ensure responsible use of your credit cards is to know everything that is going on. That means making the time every month to go over your statements to find any discrepancies that could point to fraudulent use of your credit cards -- something that can be devastating to your credit scores. As you scour your credit card statements, you will also notice all of those incidental purchases that add up to a large balance. Knowing how you spend is the first step to changing your habits for the better.

Being a credit card know-it-all also means you should be familiar with the exact balance of your card, the interest rates (and when they go up) and the fees. This will also stop you making terrible credit card mistakes if you travel overseas because you will know all about the overseas fees and charges. You will also know to keep an eye on the exchange rate.

If you have a secondary card holder on your credit cards, you will need to be doubly vigilant because their spending on your joint card goes onto your credit scores. Keep your secondary card holder in line on their spending and cancel their card if you can't trust them to be responsible.

2. Thinking interest rates are all the same. Credit card interest rates should be treated as the fluid phenomenon that they are, especially in the face of a global recession and a recovering Australian economy. Interest rate changes don't just affect your home loan repayments, your credit card interest rates can change, too. Make sure you know when rates go up, and be prepared to find a lower rate.

You may even be entitled to a lower rate on your current credit cards; it doesn't hurt to ask. In fact, if you have healthy credit scores, chances are you can claim a lower rate. If you do switch credit cards, be aware of low introductory rates, which can revert to a much higher rate down the track.

If you have completed a balance transfer on a credit card, or made interest-free purchases, make sure you read the fine print on interest rate behaviours. Interest-free periods often only apply if you pay your credit card to a zero balance every month, and balance transfer amounts will only be paid off after new purchases are made on the card.

Also be aware of the interest rate that is charged if you go over your credit limit; it could be much higher. Cash advances are also often charged at a higher interest rate than ordinary purchases.

3. Believing that minimum payments will pay off your card. What most people don't realise is that the credit card companies don't want you to pay off the entire balance of your cards; if you did that, they wouldn't make any money. Therefore, if you pay only the minimum amount listed on your credit card statements every month, the majority of that payment covers the interest you have been charged. Only a minimal amount actually reduces the balance of the card. Therefore, to get ahead of the credit card companies, try to pay more than the minimum amount listed. Even if it's just $10 or $20 a month, it will make a difference. Also make sure those payments are made on time so you can avoid late fees, which cause black marks on your credit scores.

4. Hastily closing down cards. You might think you're doing the right thing by closing down your credit card accounts to stop your spending. However, if you don't close down your accounts correctly, you could damage your credit scores even more.

If you close a credit card that has a balance, your available credit amount is changed to $0. However, since that credit card has no limit, but does have a balance, the card looks to be maxed out, and you don't want a maxed out card on your report. Closing the only credit card with available credit can have the same effect, since the total of your available credit is diminished.

If you only have one credit card, consider whether you can keep the account open. Having at least one credit card can add points to your credit scores as it shows you have experience with credit cards if you need a loan, or an additional credit card in the future.

If you are trying to choose which credit card to close, keep in mind your credit card experience here, too. Closing your oldest credit card can shorten your credit history, making you appear a riskier bet.

5. Ignoring the credit crunch and hoping it will go away. Not true. In fact, ignoring your credit cards and financial situation will just make things worse. In the current financial climate, banks and lending institutions understand how hard it is for many people to make ends meet. Therefore, if you are having trouble making your credit card payments, contact the credit card provider immediately to tell them about your situation. You may be entitled to a lower interest rate. In some cases, if you have lost your job or you have suffered a similar hardship, your credit card payments can even be halted.

Article by Vanessa Tripodi

Published: July 2, 2009