Credit cards can come at a big cost if you don't use them responsibly. These mistakes alone could cost you a fortune.
When used responsibly, credit cards are awesome. You can earn rewards, get protection for your purchases, and score cool cardholder perks such as airline lounge access or extended warranties. But if you don't use your cards in a responsible way, financial disaster is inevitable. In fact, even a single mistake with your credit card could cost you hundreds or even thousands of dollars.
Obviously you don't want this to happen, so you need to be aware of credit card errors that could cost you a fortune. If you don't want to get into trouble with your cards, here are three mistakes you should definitely avoid.
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1. Paying only the minimum
Credit cards have low minimum payments. In fact, you're usually expected to pay only a small percentage of your total outstanding balance every month. The only problem is, the minimum payment mostly goes toward interest and does little to reduce the balance due. So if you stick with the minimum as your statement suggests, you're going to waste a ton of money on interest.
If you have $3,000 in credit card debt, make a minimum payment equaling 2% of the outstanding balance, and are paying 17% interest on your card -- a pretty standard APR -- you'd be paying off your card balance for just over 27 years. That's almost three decades! The interest costs you'd incur during that time would total around $6,028, so you'd pay more than double the cost of the original purchases in interest.
To avoid this mistake, try to pay off your credit card balance in full every month. If you can't do that, allocate as much extra money as you can to your cards. Your minimum payment on that $3,000 debt starts at around $60 a month and goes down from there as your balance declines. If you instead paid $70 every month to your card until the debt was paid down, this small extra payment alone would reduce your repayment time to 67 months and reduce total interest costs to around $1,650.
2. Getting hit with a penalty APR
If you violate the terms of your cardmember agreement, the interest on your card could skyrocket. That could happen if you trigger a penalty APR, which could be as high as 29.99%.
Common reasons for triggering a penalty APR include paying late or going over your credit limit. But whatever the reason, you can expect to pay significantly higher interest costs during the time that the penalty APR is in effect.
The high penalty rate could remain in effect for up to six months on any balance you owed at the time it was triggered -- or longer if you violate your cardmember agreement again. Card issuers can also keep the penalty APR in place indefinitely on all purchases made on your card after you were hit with it. If it does, any future purchases will cost you a fortune in interest charges.
3. Not understanding how cash advances work
Many credit card issuers allow you to take a cash advance, which means you can get cash from your credit card. You can do this by requesting a PIN and taking money out of an ATM, or you can do it by using a cash advance check that your card issuer provides.
Unfortunately, the interest rate on cash advances is usually significantly higher than the rate you pay on standard purchases. It's commonly around 25% or more. You'll likely also be charged a fee of around 3% to 5% of the amount you borrow with a cash advance. And interest starts accruing as soon as you take out the cash advance, so you don't get an interest-free grace period as you would with most other credit card purchases.
Because of the high costs of cash advances, this method of accessing money from your credit card is almost always a major mistake. If you do take out a cash advance, you'll also want to pay it back ASAP to avoid the ongoing high costs of borrowing at such a high APR.
Be smart about avoiding credit card mistakes
Knowing what credit card mistakes to avoid can save you a fortune in interest costs. By steering clear of cash advances, complying with your cardmember agreement, and paying off more than the minimum, you can make sure you reap the benefits of credit cards while avoiding huge costs that could have a long-term negative impact on your financial life.
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