No one likes to make mistakes, but it’s inevitable that we all do every so often. And while things like screwing up a recipe or calling someone by the wrong name, for example, are mix-ups we can live with, mistakes relating to personal finance—whether they be caused by bad information, lack of attention to detail or simple forgetfulness—can hurt our wallets. Since you don’t want an avoidable error to cost you money, why don’t we try to learn our financial lessons, so to speak, before experiencing practical repercussions? That sounds pretty good to me, so without further ado, here are five common credit card mistakes and how you can avoid them:
1. Being overly rewards-focused
Points, miles, cash back. Sometimes it seems like rewards are the only things on consumers’ minds. I can’t tell you how many times I’ve been asked what rewards credit card someone should get when “none” is the obvious answer. A good general rule of thumb is that rewards should be your primary focus only if you have excellent credit AND pay your bill in full every month. Otherwise, building credit cost-effectively with a card that has a low fee structure or avoiding interest with a 0% credit card will benefit you more. If these cards come with some sort of rewards program, consider that a happy accident.
In addition, if you meet the general criteria for rewards, don’t automatically focus on travel rewards. The possibility of point/mile devaluation, which increases if you’re not able to redeem often, make travel rewards only suitable for frequent travelers (i.e. people who compile 20 nights in a hotel and/or 30,000 miles in an airliner per annum).
2. Using an NPSL card
Let’s get this out of the way to start: There is no such thing as a credit card without a spending limit. There are, however, credit cards with limits that are determined on a month-to-month basis and are not communicated to cardholders or credit scoring agencies. The problem is, many people mistake them for unlimited cards and are surprised when they get declined at the point-of-sale or when their credit scores fall as a result of the misleading credit utilization data that some issuers provide companies like FICO, the largest credit-scoring outfit in the U.S.
Cards susceptible to such unfortunate mistakes all share a common feature: No Preset Spending Limit, commonly known as simply “NPSL.” Credit card companies choose not to inform NPSL cardholders of their exact monthly limits or provide credit scorers with straightforward, accurate credit limit information because they want to prolong the myth of an unlimited credit card.
3. Spending beyond your means
Simply put, your financial outlay should not exceed your income. While revolving a balance is sometimes necessary to finance an important big-ticket purchase or handle an emergency situation, for example, allowing your monthly spending to consistently exceed your means speaks to some fundamental financial problems.
If you are currently in debt, eliminate expenses until only true necessities remain (i.e. food, shelter, health insurance). Then use the Island Approach to systematically pay down what you owe, designate a credit card as being only for everyday expenses and pay off this card in full every month. If ever you incur service charges, it means your everyday expenses have gotten out of hand and adjustments are in order.
4. Using the wrong credit card to travel
People often mistake a credit card’s network (e.g. Visa, MasterCard, Discover) for its issuer (e.g. Capital One, Bank of America, Chase, Citi). While this isn’t the primary mistake we’ll be addressing here, it’s a good thing to clear up, especially given the importance of both credit networks and issuers to overseas travel. Your credit network dictates both the number of merchant locations and, more importantly in this instance, the countries in which you can use your card. Visa and MasterCard have the greatest worldwide acceptance, so you should open a Visa credit card or a MasterCard credit card before traveling abroad or even booking your travel accommodations.
I suggest getting your card before making arrangements for flights and hotels instead of simply before you leave because foreign transaction fees get assessed any time your card is processed by a foreign merchant. This is where your card’s issuer come in; some issuers—namely Capital One, Chase, Citi and HSBC—offer no international fee credit cards.
Using a credit card abroad is preferable to cash because Visa and MasterCard automatically provide exchange rates that can be up to 15% less than the most frequently used ways of converting cash.
5. Mistaking the minimum payment for the total amount due
The minimum payment is simply the amount you must pay each month in order to stay current on your bill or avoid the further progression of delinquency. It’s usually around 3% of the balance. The amount due shows up on your statement when you become delinquent and is the sum of your missed payments plus the current month’s payment. As a result, many people see that amount, get overwhelmed and wind up sending nothing—not even a minimum payment, which would prevent them from becoming further delinquent.
This article was written by Card Hub’s editorial staff. Card Hub is a leading online marketplace for credit card offers, prepaid cards and gift cards.