Common credit card problems to avoid

Quick insights

• When used correctly, credit cards can offer many benefits over cash or other payment methods, including safety, convenience, and rewards.
• Failure to adequately understand the terms of your credit card could lead to late payments, significant interest charges, unexpected fees, harm to your credit score and more.
• By addressing or avoiding common credit card problems, your card can work for you and help to improve your credit score, credit history and overall financial well-being.

Credit cards can be a double-edged sword. On the one hand, credit cards offer many benefits, such as convenience, rewards, and the ability to build credit. On the other hand, misuse can lead to debt, interest charges, late fees and a damaged credit score.

Unpacking common credit card mistakes

Let’s start with a quick review of some of the most common credit card mistakes:

• Making late payments: Failing to pay your credit card bill on time can result in late fees, negative credit score impact, and potentially even higher interest rates.
• Paying the minimum balance: While paying the minimum balance keeps your account in good standing, it can lead to significant interest charges over time as the remaining balance continues to accrue interest.
• Maxing out your credit limit: Maxing out your credit card by using all your available credit leaves no room for emergency spending and can lead to a high credit utilization ratio, lowering your credit score. Additionally, your credit limit may be much higher than the funds you have available to pay back your balance, which could lead to interest charges.
• Applying for too many cards: Each credit card application results in a hard inquiry, which can temporarily lower your credit score. Multiple applications in a short time frame can also signal to lenders that you're a high-risk borrower.
• Not reviewing monthly statements: Not reviewing your credit card statements can lead to you to miss fraudulent charges or errors. It could also mean you may not be fully aware of your spending habits or the amount of debt you're accumulating.
• Not understanding credit card terms: If you don't understand the terms of your credit card, such as interest rates, fees, and grace periods, you could end up incurring unexpected charges. This includes, but is not limited to, cards with an annual fee, which is still charged even if you otherwise stop using the card.
• Closing old cards: Closing old or unused credit cards may seem like a logical choice, but it can have unexpected negative side effects. Closing accounts can decrease your available credit, increase your credit utilization rate, and decrease your average age of accounts, which can negatively impact your credit score. If they don’t carry an annual fee, it may be better to keep old credit cards open, even if you don't use them frequently. It can be important to weigh your options because if you’re tempted to use old credit cards to a point where you may accrue debt, then closing old ones could be the best option.
• Taking out a cash advance: Cash advances usually come with high fees and interest rates, and the interest typically starts accruing immediately, with no grace period.
• Paying foreign transaction fees: If you use your credit card abroad or make purchases in a foreign currency, you may be subject to foreign transaction fees. These fees can add up and make your trip more expensive than anticipated.

Decoding the impact of credit card mistakes

Each of these mistakes can have serious consequences, for example:

• Late payments can result in fees, increased interest rates and a hit to your credit score.
• Only paying the minimum balance can lead to mounting debt due to compound interest, and it makes it increasingly likely that you could reach your credit limit if you continue to use the card.
• Maxing out your credit limit can lower your credit score, making it harder to get loans and other lines of credit in the future.
• Applying for too many cards at once can also negatively impact your credit score, as each application results in a hard inquiry on your credit report.

Some of these mistakes carry more serious and immediate consequences than others.

Strategies to avoid credit card mistakes

Avoiding these mistakes requires discipline and a good understanding of how credit cards work. Below, we’ll examine some useful strategies for avoiding some of these common credit card missteps:

• Automatic payments: To avoid late payments, you could set up automatic payments for at least the minimum amount due each month. This ensures you don’t miss a payment deadline and may help prevent the corresponding late fees and credit score hit that typically come with it.
• Pay more than the minimum: Aim to pay off your balance in full each month to avoid interest charges. If that's not possible, try to pay more than the minimum to reduce the amount of interest you'll accrue. Paying off more than the minimum also helps to maintain a favorable credit utilization ratio.
• Keep credit utilization low: A credit utilization ratio of 30% or less is generally considered good, with 20% or less being seen as ideal. For example, if you have a credit limit of $5,000 and carry a balance of $2,000, your credit utilization ratio is 40%; if you pay off $1,000 of that balance, your credit utilization ratio drops to 20%. A low credit utilization ratio can help maintain a healthy credit score.
• Strategic applications: Only apply for new credit cards when necessary and space out your applications. This can help minimize the impact of hard inquiries on your credit score. It can also be helpful to plan your new cards strategically to benefit from perks like welcome bonuses that most benefit you.
• Review your statements: Make it a habit to review your credit card statements each month. This can help you catch any errors or fraudulent charges and keep track of your spending to avoid going over budget.
• Understand your terms: Take the time to read and understand your credit card's terms and conditions. Knowing your card's interest rate, fees, and grace period can help you avoid unexpected charges.
• Keep old cards open: Even if you don't use them often, keep your old credit cards open unless they carry an annual fee. In the case of cards with an annual fee, check with your issuer to see if you can change to another card that doesn’t have an annual fee. Keeping old cards open can help maintain a larger amount of available credit and lower your credit utilization ratio. Remember, consider closing old cards if you’re tempted to over-use them or go over your budget.
• Regular use: Using your credit card for small, regular purchases and paying off the balance in full each month can help you build a good credit history and potentially increase your credit score.
• Avoid cash advances: Unless it's an emergency, avoid taking out cash advances on your credit card. The high fees and interest rates make them an expensive option.
• Avoid foreign transaction fees: If you frequently travel abroad or make purchases in a foreign currency, consider getting a credit card that doesn't charge foreign transaction fees. These types of cards are increasingly common, and they can help you save money on international purchases while still offering the other benefits of credit card use.
  

How Chase Freedom Rise^® can help

The Chase Freedom Rise^® card is designed to help cardholders avoid these common mistakes. With 1.5% cash back on every purchase, low annual fee and no requirement for prior credit history, it's a great tool for those new to credit. The card has a simple application process that can be completed right on your phone or computer. As with any card, it’s important to review the Chase Freedom Rise terms and conditions before applying.

Bottom line

Understanding common credit card mistakes and how to avoid them can be helpful for maintaining good financial health.