The following is a guest post by Odysseas Papadimitriou.
“It’s ok, everyone makes mistakes.” While somewhat reassuring, you really don’t want to have this cliché lobbed in your direction because that could, obviously, only mean one thing: that you made a mistake. Of course, this trite message is true, and everyone does screw up on occasion. The trick is limiting the frequency and magnitude of your mistakes. One area of life in which you want to be particularly careful to avoid them is your finances. Financial missteps can cost you money and credit standing, yes, but perhaps more importantly, they can lead to a great deal of stress. So, with that being said, here are five common mistakes that people make with their credit cards and how you can avoid them.
Mistake: Using a No Preset Limit (NPSL) Credit Card or Charge Card
What you should do: In explaining what you should do it’s important to start with what NPSL cards are not, and that is unlimited. Fooled into thinking that NPSL credit and charge cards don’t have spending limits by a combination of urban legend and issuers who don’t inform customers or major credit bureaus of their presence, many consumers have opened cards like the Visa Signature, the World MasterCard, and charge cards from American Express over the years, unaware of the secrets they hold. Unfortunately, use of such cards could leave you with a misleadingly high credit utilization ratio, which can hurt your credit score. The juice just isn’t worth the squeeze when it comes to the NPSL feature, so opt for a card without it if you can.
Mistake: Using a Balance Transfer Credit Card for Rewards
What you should do: People often misuse their balance transfer credit cards, and I’m talking about more than failing to pay down their balances before low interest intro offers run out (though that should certainly be avoided as well!). No, I’m talking about people who try to use their balance transfer credit cards as conduits to rewards earning. The problem is that most issuers only allow rewards to be earned on purchases and no other transactions. What’s more, any purchases that you make on a card with a revolving balance begin accruing interest immediately, almost like a cash advance. There is no grace period when you already have a balance, after all. My advice is to stick to using balance transfer credit cards for the purpose that is contained within their name: transferring balances and paying down this debt at a lower interest rate.
Mistake: “Bribing” the Credit Card Company
What you should do: You might think that paying your bills in full is a rather basic piece of advice, and you would certainly be right. Unfortunately, consumers from time to time get the idea that it will benefit their credit scores to leave a small unpaid balance at the end of the month. They must think that by giving their credit card issuers a bit more interest revenue they are earning some favors, but in truth all they are doing is wasting money. So don’t do this if you can help it. It certainly won’t help you.
Mistake: Not Having a Credit Card in Your Name
What you should do: Whether you are a college student just entering financial independence or are married with kids, it is important to have an open credit card in your name (not as an authorized user), even if you aren’t going to use it. Every month that you have an open card, positive information will be added to your major credit reports, provided that you make on-time payments and don’t go over limit. Every month you don’t have a card open is therefore a missed opportunity. Obviously, this is most important for people with thin credit files, but you should take notice even if you have an extensive, exemplary credit report. One sure fire way to destroy your credit score is to default on your payday loans. If you don’t consistently add new information to your credit reports and a gap begins to grow in your file, your credit score could fall rapidly, making it necessary to re-establish your credit in the future. That’s why the new rules about credit card applications and household income worry so many stay-at-home parents.
Mistake: Reading Too Much Into the New Credit Card Law’s “Under-21 Rule”
What you should do: Piggybacking on the advice from above, college-age students should get credit cards in order to begin building solid credit histories as soon as possible. Your credit score is key, given that it dictates your ability to get loans, lease cars and apartments, and even get certain jobs. Many people believe that the CARD Act shuts young people off from credit, but that isn’t necessarily true. All it does is require that students provide financial information that indicates an ability to independently make the minimum payments associated with a credit card account (around $15), which is the same thing required of everyone else.
Odysseas Papadimitriou is the CEO of Card Hub, a leading marketplace for the best online credit card deals.