The Costliest Mistakes You Can Make With Your Credit Cards

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January 24, 2023

The Costliest Mistakes You Can Make With Your Credit Cards

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If you pay them on time each month and don’t carry a balance, your credit cards can help you build a strong credit score. And if you have a rewards card, you might earn cash back, free airline miles, no-cost stays at hotels, and other perks while doing this.

But if you misuse your cards? Your monthly debt could skyrocket, your credit score could plummet, and your bank account could take a beating from costly penalties.

Here are five of the most common credit card mistakes people make. Want to keep your finances healthy and avoid costly penalties? Make sure to avoid them.

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1. Paying your bill late

One of the costliest credit card mistakes you can make? Paying your bill late. Doing this can hurt you in many ways.

Your credit card provider will charge a late fee if you don't make your card's minimum monthly payment by your due date. According to federal law, card providers can charge a maximum late fee of $29 for your first-time late payment and a maximum of $40 for every subsequent late payment.

Your provider might also raise your interest rate. Many cards charge a penalty APR if you don't make your credit card payments for 60 days or more. That penalty APR rate varies – you can find it in your card agreement’s fine print – but it is often as high as 29.99%. Card providers must notify cardholders when they plan to raise their interest rates.

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And the biggest negative of paying your credit card late? It could damage your three-digit credit score. Lenders study your credit score when determining whether you qualify for loans or new credit and at what interest rate. The higher your score, the lower your interest rate typically is, with most lenders considering a FICO credit score of 800 or higher to be an excellent one.

Your payment history is the biggest factor in determining your credit score. If you pay your credit card bill 30 days or more past its due date, this late payment will be reported to the three credit bureaus of Experian, Equifax, and TransUnion. A single late payment could cause a cardholder’s credit score to fall by 100 points or more. It will also remain on your three credit reports for seven years.

The lesson? Understand your credit card’s grace period, the period between the end of its billing cycles, and when your payment is due. Pay your credit card bill on time each month. And if you are late? Pay it before 30 days pass to prevent your credit score from dropping.

2. Only making the minimum required monthly payment

If you make your minimum required credit card payment each month, you won’t get penalized by your card provider. But only paying this minimum amount is still a big financial mistake.

That’s because of the high interest rates that credit cards charge. Depending on your credit, you might pay interest rates of 19%, 21%, or higher on the debt you carry on your card. If you only pay the minimum each month and carry a balance on your cards, your debt will grow quickly because of these high-interest rates.

Paying off your credit card debt could take years, too, if you only make your minimum monthly payments.

Say you owe $9,000 on your credit card, and your interest rate is 21%. If you make your required minimum payment only each month, it will take you 338 months, or more than 28 years, to pay off that debt. You'll also pay about $15,124 in interest during this time. And those figures only hold if you don't make any new charges.

Your best move is to pay off your entire balance by your credit card’s due date each month. If you can’t do this, try to pay at least more than the minimum.

3. Running up too much debt

Not paying your credit card balance in full each month can hurt you in another way: It, too, can cause your credit score to fall.

If you have a large amount of credit card debt, this could throw off what is known as your credit utilization ratio. The higher this ratio, the worse it is for your credit score.

Say you have $30,000 worth of available credit spread across three credit cards. If you have $20,000 of total credit card debt, your credit utilization ratio is about 66%, which you get by dividing 20,000 by 30,000.

That’s a high utilization ratio. If you instead only had $3,000 worth of credit card debt, your credit utilization ratio would be 3,000 divided by 30,000, a more palatable 10%. There is no set rule for how much your credit-utilization ratio should be but aiming for 30% or lower is a good rule of thumb.

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Charging up to a card’s credit limit can also hurt your debt-to-income ratio, a measure of how much of your gross monthly income – your income before taxes is taken out – is consumed by your total monthly debts. Lenders will look at this ratio when determining whether to approve you for a loan or new credit. Say you are applying for a mortgage loan. Most lenders want your total monthly debts, including your estimated monthly mortgage payment, to eat up no more than 43% of your gross monthly income.

Too much credit card debt could cause your debt-to-income ratio to soar, so be sure to pay off as much of your debt as you can each month.

4. Taking out cash advances

If you’re short on cash, you can take out a cash advance with your credit card, using it as a debit card to take out money from an ATM. This might seem convenient but doing this is a big mistake.

Why? Credit card cash advances are notoriously expensive. Your card provider will charge a fee for these advances, often either $5 or 5% of the amount you withdraw, whichever is greater. If you take out $200, you'd be hit with a fee of $10, 5% of your cash advance.

But that's not all. Your provider will also charge interest on your cash advance, and this interest rate will almost certainly be high. Rates vary, but card providers typically charge from 17.99% to nearly 30% interest on cash advances.

The lesson here is clear: If you need to withdraw money, use your debit card. Skip the cash advance.

5. Not paying a balance transfer off in time

Many credit cards offer an introductory interest rate of 0% on balance transfers. If you are paying off a large amount of credit card debt at a high interest rate, transferring this debt to a new card with one of these offers could make sense: You can pay down your debt without paying interest on it.

The key is to pay off this debt in full before the 0% introductory offer ends. If you don’t, your provider will charge you its standard APR on the debt you haven’t paid off. This defeats the purpose of transferring your balance.

An even worse mistake? Running up new credit card debt while failing to pay off your balance transfer before that introductory period ends.

Though it varies by the card provider, most 0% balance transfers run for 12 to 18 months, meaning that you might have up to a year and a half to pay off your transferred debt interest-free. Before transferring your debt, ensure you can afford to pay it off before that introductory offer ends.

Be aware of the balance transfer fee that your card will charge, too. Most cards charge a fee of 3% to 5% of the amount you transfer. If you transfer $3,000, your balance transfer fee will be $90 to $150.

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The bottom line

Making any of these five credit card mistakes can cause your credit score to plummet and your high-interest-rate debt to soar. But don't let that scare you away from credit cards: If you instead pay your bill on time each month and pay off your full balance by your due date, you can use your cards to improve your credit score and earn valuable rewards.

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Dan Rafter is a freelance writer who has more than 20 years experience covering personal finance. He's written for the Chicago Tribune, Washington Post, Bankrate, CreditCards.com, Rocket Mortgage, NortonLifeLock and several others.

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