Typical Credit Card Mistakes (And How To Avoid Them)

When used responsibly, credit cards can be quite beneficial. However, many people misuse them, leading to significant financial problems. According to Debt.org, a consumer advocacy organization, over 189 million Americans have at least one credit card, and the average cardholder has at least three, with many owning four or more.

The average household with a credit card carries nearly $8,500 in credit card debt, contributing to a total U.S. consumer debt of $13.86 trillion. Clearly, credit cards are a major source of debt and stress for many. The good news is that knowledge is power. With careful planning, you can avoid the common pitfalls associated with credit cards. Here are ten common credit card mistakes people make and how to avoid them.

Most people only know two things about their credit card: the brand (Visa, MasterCard, Amex, etc.) and the spending limit. Beyond that, they’re often in the dark. Many cardholders are unaware of their exact interest rate, the due date for monthly payments, the minimum payment amount, or the penalties for missing a payment—such as sharply increased interest rates.

This lack of knowledge can lead to serious trouble. Missing payments or not covering the minimum payment can cause your interest rate to soar from a standard 18-19% to the high-20s. This can snowball quickly, turning your credit card into a financial burden. To avoid this, take the time to read the introductory information that comes with your card. Understanding the terms you’ve agreed to is essential for every credit card owner.

Credit card reward programs are increasingly popular but can be quite complex. Financial institutions offer these programs for two main reasons: to attract new cardholders and to encourage frequent card use.

Rewards typically fall into three categories: cash, points, or miles. Cash rewards are the most common and appear straightforward, but they can be tricky. Often, cash rewards are not paid directly but are instead applied as a credit to your account. Some programs only allow you to redeem cash rewards at the end of the year.

Point rewards are accumulated based on your spending. A typical structure might offer one point per dollar spent. However, these points are often redeemable only for merchandise available on the credit card company’s online store, which may have a limited selection.

Miles or travel reward cards allow you to earn miles that can be redeemed for airline tickets. The earning rate and the number of miles required for a ticket vary by card and airline.

The key takeaway is that rewards programs can be convoluted and restrictive. Additionally, carrying a balance on your card can quickly negate any rewards you earn. For instance, consider how much you spent to earn enough miles for a one-way ticket to New York City. If you didn’t pay off your balance in full each month, the trip wasn’t as free as it seemed, as interest charges could quickly erode the value of your rewards.

Maxing out your credit card is a risky move with potentially severe consequences. Once you reach your card’s limit, any additional charges can result in penalties, fees, and higher interest rates. Despite these risks, a significant number of Americans have maxed out their credit cards at least once.

According to a study by personal finance website The Ascent, more than half of Americans surveyed admitted to reaching their credit card limits. Specifically, 52% of respondents reported hitting their card limit, including 50.3% of Millennials, 58.8% of Generation X, and 39.3% of Baby Boomers. While this may benefit credit card companies, it poses significant financial challenges for consumers.

The best practice is to pay off your credit card balance in full each month. Alternatively, it’s advisable to maintain a buffer on your card and avoid reaching the limit altogether. Once you’re at the brink of your credit card limit, any further spending can lead to financial stress and downward spirals in credit health.

This mistake often accompanies the previous one. When you hit the limit on your credit card, the temptation is to request a higher limit. The bank might grant it, especially if you’re making minimum payments. However, this only deepens your debt.

If you maxed out your card at its old limit, chances are you’ll do the same with the new one. Your debt increases from $10,000 to $15,000, then to $20,000. Raising your credit limit typically amplifies the debt burden, which isn’t favorable.

A wiser approach is to pay down your credit card balance and avoid increasing the limit. Hitting your card’s limit signals overspending beyond your means. It’s not a cue for a higher credit ceiling; rather, it’s an indication to either cut back on spending or boost your income. Perhaps both.

Credit card companies often entice customers with “low introductory rates,” where the interest charged is remarkably low for a set duration, typically six months to a year. Some even offer 0% interest during this period, attracting sign-ups and balance transfers from other cards.

The catch is that this introductory rate eventually expires, replaced by a much higher rate, often without the cardholder’s awareness. Suddenly, the interest-free period ends, and you’re faced with rates as high as 21% or more. It’s a common trap.

Many find themselves in a predicament when the balance transfer they hoped to pay off is now subject to hefty interest charges. Generally, it’s wise to steer clear of these cheap introductory rates unless you have the discipline and income to benefit from them.

Opting for a card with a consistently lower interest rate, like 10% to 14%, is often a better choice than succumbing to the allure of 0% interest. Remember, the fine print usually indicates “…for a limited time only.”

Cash advances can be a financial nightmare. Unlike regular purchases, they often incur significantly higher interest rates, sometimes exceeding 28%. While standard purchases might carry an 18% interest rate, withdrawing cash from your credit limit can lead to much steeper charges.

Moreover, the special interest-rate promotions, like no interest for a year, usually don’t apply to cash advances. Adding insult to injury, credit card companies tack on a transaction fee of 2% to 4% for cash advances. Unlike regular purchases, interest on cash advances starts accruing immediately, without any grace period. Plus, these transactions typically don’t qualify for any rewards offered by the card.

In summary, withdrawing cash from your credit card is almost always a poor financial decision.

Relying solely on the minimum monthly payment for your credit card won’t get you very far. Typically, the minimum payment barely covers the interest charged on the balance. While most cards require only a minimum payment each month—usually a fixed amount like $20 to $25, or a small percentage of your balance—this approach is never recommended.

According to calculations by personal finance website NerdWallet, let’s say you have a credit card debt of $6,000 with a modest interest rate of 14.99%. If you stuck to making the minimum payment for a year on this hypothetical card, you’d accumulate $4,064 in interest charges alone, ballooning the total debt to over $10,000. It’s wise to pay off your credit card in full each month. If that’s not feasible, aim to make payments exceeding the interest charges. Even incremental progress beats making no headway at all.

We’ve emphasized this point before, but it bears repeating: owning too many credit cards is a significant mistake. Generally, one credit card suffices; having more than that is often ill-advised. Yet, according to a Gallup Inc. study, the average American adult possesses three credit cards. It’s worth noting that nearly 30% of Americans don’t own any credit cards at all, indicating that it’s feasible to navigate life without them.

If you feel the need for a credit card, it’s prudent to limit yourself to just one. Our recommendation is to opt for a card with a modest credit limit, ranging from $5,000 to $10,000. Ideally, reserve its use for emergencies only. Pay off the balance in full each month to avoid accruing interest charges. Juggling balances across multiple cards makes it challenging to monitor and manage your debt effectively. One card, used judiciously, is the wisest choice.

Despite their advertising claims, credit card companies aren’t necessarily looking out for your best interests. Missing a scheduled payment can lead to serious repercussions. Not only does your interest rate typically skyrocket, but you’ll likely also face penalty fees. These “late fees” can reach as high as $40 per occurrence.

The combination of increased interest rates and penalties can significantly complicate managing your credit cards and paying them off. Moreover, missing a scheduled payment can result in the loss of any promotional or introductory interest rates on your card, cancellation of your rewards program, and a negative mark on your credit report. It’s a situation best avoided altogether. Essentially, a missed payment triggers a red flag with the provider, leading to a cascade of punishments until you’re left regretting the oversight. It’s simply not worth the risk.

How you utilize your credit card matters significantly. Whether it’s reserved for emergencies, used strategically for earning travel rewards, or deployed for seasonal expenses like holiday shopping, one thing remains crucial: avoiding significant purchases. We’re talking about splurges on appliances, furniture, or even a car.

Making large purchases on your credit card is a recipe for accruing a hefty balance, amplifying interest charges, hitting your credit limit, and potentially struggling to meet the minimum monthly payment. Opting instead for a series of smaller, manageable transactions that can be paid off in full at the end of each month is the wiser path. Many individuals regret freely swiping their credit card for big-ticket items, only to face remorse later. It’s prudent to save up and pay cash for significant expenses like a new TV or dishwasher, bypassing unnecessary debt altogether. Leveraging your credit card for these substantial purchases without immediate repayment capabilities should be strongly discouraged.