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Have you ever gotten a cash advance on your credit card or gone over your credit limit in a non-emergency situation? Think everyone should get a rewards credit card? Do you carry a balance on your business credit card? If you answered yes to any of these questions, then you, like every other plastic-wielding consumer in the world, have made a credit card mistake. It’s nothing to be ashamed of, given the pages of fine print, changing laws and often confusing terminology, but making mistakes with your credit card can cost you both money and credit standing. So, with that being said, what better New Year’s Resolution could there be than vowing to eliminate the following five credit card mistakes from your life in 2012?
1. Automatically putting rewards atop your list of credit card priorities. It’s hard to believe given the tenor of television ads, but consumers should only focus on rewards if they have good-to-excellent credit and always pay their monthly bills in full. Just think: If you don’t pay your bills in full, which would be of greater service to you, a credit card offering a 0% interest rate or one with rewards? Since the cost of finance charges always surpasses rewards savings, the answer would have to be the 0% credit card. If you have average credit history, would you rather get a card offering exceedingly modest rewards or one without an annual fee that will allow you to build credit at a lower cost and eventually qualify for a truly rewarding rewards card with more money in the bank? The no annual fee credit card, most likely. The best 0% and no annual fee credit cards might also offer rewards, but the point is that you shouldn’t seek out rewards if other credit card features will be more helpful.
2. Being all business. One of the many changes brought about by the CARD Act – the personal finance reform law that took effect in February 2010 – is the increased relevance of personal (general-use) credit cards to small business spending. You see, the CARD Act only applies to personal credit cards, which means that its rule preventing issuers from increasing interest rates on existing credit card debt without cause also only applies to personal credit cards. If you want any sort of debt stability for your small business, you should therefore use a personal credit card for financing your company’s operations. Don’t worry about increased personal liability either; you are held personally liable regardless of whether you use a business credit card or a personal credit card.
3. Mishandling a balance transfer. There are two primary mistakes that people make when using balance transfer credit cards: 1) thinking they can avoid interest by hopping from 0% card to 0% card; 2) making purchases.
Before opening a balance transfer credit card, make sure you will be able to comfortably pay off your debt prior to the 0% introductory term ending and high regular interest rates taking effect. There might not always be 0% balance transfer cards available, after all, and you don’t want to get stuck with a lot of debt on a card that has high interest rates. What’s more, you don’t have a grace period for new purchases when you revolve a balance on a credit card, which means you would be better off using a separate card for everyday purchases.
4. Applying en masse. Multiple credit card applications within a short period of time signal desperation and risk to the major credit bureaus and, in turn, can damage your credit score for about six months. That’s why putting out a bunch of credit card feelers and hoping you get approved for one is a poor strategy, especially if you’re applying for a loan anytime soon.
5. Not having a credit card. After all of this, you may be thinking that a credit card is more trouble than it’s worth. Au contraire, my friend. While I am, of course, biased, a credit card is the most efficient credit building tool and will provide credit standing gains whether you actually make purchases with it or not. Both fraud protection and rewards are also better with a credit card than a debit card. Therefore, even if you don’t trust yourself to spend responsibly with one, at least have an open credit card locked away in a drawer. Don’t forget to pay any balances or fees on your account before turning the key though!
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