Using credit cards properly isn’t as easy as it seems, especially for first-time credit card users. With lots of fine pint and complex credit score implications, there’s much more to using credit cards correctly than just making purchases and paying bills.
Learning the downsides to credit cards the hard way often provides valuable lessons, but it’s an expensive way to learn. Instead, first-time credit card users should avoid these seven common mistakes.
1. Not reading the fine print
No matter what kind of agreement we’re talking about, it’s hard to convince anyone to read the fine print. For credit cards, many terms are listed that users might not take the time to understand. The shock comes later when interest rates increase and fees are assessed.
The good news is that credit card terms and conditions are standardized thanks to the Schumer box. The information is all there in fairly-plain English, and shouldn’t take more than a few minutes to read over. The box will state any fees for late payments or annual fees that come with the card. Interest rates and other important facts are noted, too.
Card users can turn to glossaries to further understand the terms when they need to.
2. Considering credit cards to be free money
This one is a no-brainer to anyone that’s already used a credit card, but might not be so obvious to someone who’s new.
Anyone who signs up for their first credit card and considers it free money is looking for trouble. If this is your approach to credit cards, you’ll quickly land in debt and be up to your neck in payments. Not only that, but you’ll be looking at big fees and interest charges when you don’t play by the rules.
3. Not realizing the cost of mistakes
There are many different aspects of credit that affect finances more than just what’s spent on the card. Unfortunately, some people find these things out the hard way.
A late payment on your credit card might cost $35, but the effects on your credit in the future can be long-standing. The difference between good and bad credit scores is clear. Just one late payment can drop your credit score, limit your options for future credit cards, and increase the costs of loans.
New credit card users might not realize that these mistakes can’t easily be erased, either. The reality is that these negative marks will stay on a credit report for seven years. Credit cards affect each factor that goes into a credit score, too, meaning your credit score is easily influenced by how you use your credit card.
4. Rewards can be overrated
First-time credit card users get excited about the rewards the cards offer. This could be signup bonuses, cash back, and flyer miles. All these perks are great, and users often earn more rewards the more money they spend on their cards. But the benefits are erased quickly if payments are missed and interest charges start piling up.
For example, you might earn rewards of 3% cash back on your card. That’s $30 for every $1,000 you spend. But if you let that $1,000 balance stay on your card for one month at 18% APR, you’ll be charged $15 in interest for the first month alone. As long as your $1,000 balance stands, you’ll continue to accrue this $15 charge plus interest on any increasing balance.
Just one late payment fee of $35 wipes out your entire reward and more in this example, and can push you into penalty interest rates, too.
5. Applying for multiple cards
First-time credit card users should apply for just one card to start. Too many potential issues arise with applying for multiple cards right out of the gate.
To start, new credit card users might not be able to get more than one card. Making several credit inquiries all at once can be damaging to a credit score, especially one with a short history.
New credit card users should see how they manage one credit card first. Having multiple cards can mean higher credit lines and more debt if new users find themselves in trouble.
6. Forgetting to look out for fraud
Credit cards do provide protection against identity theft and fraud, but it’s not automatic and is up to the card user to spot and report it.
New credit card users should always look over statements before paying their bill. Keep in mind that fraudulent charges might only be small in amount and may blend in with legit purchases.
It’s important to take a close look and make sure that all charges are familiar. Any suspicious charges need to be reported immediately to their credit card issuer.
7. Not monitoring balances to control spending
Studies have shown that credit cards encourage more spending compared to cash. Everyone handles this differently, but new credit card users might not realize it until it’s too late.
New users might be used to a cash-only budget. When they run out of cash, they can’t spend anymore.
Unfortunately, this isn’t the case with credit cards where users can spend up to their credit limit regardless of what’s in their checking account.
New credit card users might wait until their statement comes to check their balance, and at that point it may be too late. If they’ve already spent beyond what they can afford to pay, they’ll end up in debt.
Instead, new credit card users should check their balances regularly to make sure they’re keeping spending in check. This can easily be done with online banking and can even be synced with mobile apps for easy access.