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5 Mistakes to Avoid with Credit Cards
It’s important to also know about what not to do with credit cards, as there are certain things that could cost you money. Here are certain mistakes to avoid doing with credit cards.
Mistake #1: Not Paying off Balances in Full on Time
I’ve stated this before, but it’s important enough to be reiterated again. Always pay off your balance in full and on time! Interest rates in credit cards are in the double digits, which will nullify the rewards you’d get from your spend on credit cards.
Mistake #2: Max Out Your Credit Cards, Cycling Credit
Not maxing out your credit card is a conventional wisdom that I’m sure many are familiar with. Ideally, you should keep utilization rate below 10% to have meaningful positive effects on your credit score. This can be done by paying a portion of your credit used until it’s below 10% before the statement date is closed.
However, there’s another part I want to get into that’s related to paying off a portion of your balance before the statement date. It’s called credit cycling. Credit cycling happens when you max out your credit card, pay it off before statement date, then make more charges later. For example:
- You have a $5000 credit limit on your card with a statement date closing on the 24th day of the month.
- You charge $4900 on the card on the 7th day of the month
- You pay off $4850 of the credit used on the 14th day of the month
- You charge another $3000 on the 16th day of the month
- You pay off $2800 on the 21st day of the month
To a lender, this can look bad and put you at risk of a shutdown, especially on a new card.
Best thing to do is wait another month for a new credit cycle to come up and keep consistent payments to build a relationship with the lender to then ask for credit limit increases in the future.
Another thing to do is to use another card for future purchases in case you’ve already spent close to the actual amount of credit you’re given to in one billing cycle on a card.
Mistake #3: Cash Advances
Cash advances are transactions that are similar to withdrawing cash from ATM’s. Although it’s possible to withdraw cash from credit cards, it’s generally not encouraged to do so. The issues with cash advances are the fees and high interests associated with them. You also won’t get points from them and they do not count towards a signup bonus progress. Cash advance policies differ from issuers, but they largely consists of:
- withdrawing cash from ATM
- purchasing cryptocurrencies, bullion
- peer-to-peer money transfers
Cash advances should only be reserved as a last resort!
Mistake #4: Paying Processing Fees*
Credit cards make money through processing fees that goes through every transactions made. Some merchants pass on the processing fees to the consumer instead.
Average processing fee is around 2-3%, so paying the fees will nullify or even lose you money, as 2% on spend is generally the baseline to achieve with credit cards.
BUT! With an asterisk but*!
There’s an exception to this rule when you are working towards hitting a minimum spend requirement for a sign up bonus! A good example of this is if you owe some hefty taxes, there’s an option to pay online with a credit card. Although, it may come with a 2% fee, the signup bonus will generally outweigh the fee. This is one of those times where it’s worth stinging yourself with a small fee for a much bigger reward!
Mistake #5: Close Prematurely
There may be times where either life situation changes and you no longer gain value from a card or you’re just trying to get the bonus and never use the card ever again. It’s important to at least wait for a full year after the approval date
If there’s an annual fee, it’s best to close it after the second annual fee posts on your statement. That way, any signup bonuses you’ll receive will be safe and not get clawed back and it won’t look as bad to the lenders.
These are some basic things on what not to do with credit cards. Although there are certain pitfalls when you advance in the credit card game, mainly psychological, in which I will cover in future posts. These are just the basic mistakes to avoid to gain better rewards, build better relationships with lenders, and build and maintain a good credit score.