This story is part of 12 Days of Tips, helping you make the most of your tech, home and health during the holiday season.
Credit cards, when used correctly, are helpful financial tools for saving. A good credit card can earn you rewards, build your credit and help you rack up travel points and perks. But they're not without financial risks, which are essential to be aware of.
If you pay a card late or don't pay your balance in full, you can incur fees and extra interest charges that make your purchases more expensive in the long run, especially considering today's rising interest rates, fueled by skyrocketing inflation. You could also wind up jeopardizing your credit score, which could make it harder to buy a house or get a loan.
So what are the biggest mistakes well-meaning people commonly make with their credit cards -- and what can you do to avoid financial pitfalls? I spoke with experts for their suggestions, and identified some of the most dangerous credit card behaviors. For more, learn about the best credit cards for bad credit.
Paying your credit card bill late
Missing a payment or making a late payment on a credit card is a major no-no. Colleen McCreary, a consumer financial advocate at Credit Karma, says this is the most common mistake people make with credit cards. Your payment history is a major factor of your credit rating and accounts for more than 30% of your overall score, McCreary said in an email.
A late payment is a one-way ticket to ruining your credit, and the ding on your report won't go away for seven years. Even worse, if your credit card bill remains unpaid, your creditor could sell your debt to a collection agency, which could tank your credit rating.
The best way to avoid late fees is to set a monthly reminder to pay your bill, and at least make the minimum payment. Most credit card companies will also let you set up monthly auto-payments, so you won't skip a beat. If you're worried you may not have enough each month to cover an autopayment, remember you can always set it to pay out the minimum, the full balance or a specified amount.
The credit bureau Experian notes that some credit card issuers may provide a short grace period for late payments, while others will mark your payment late as soon as you miss your due date.
If you do pay your credit card bill on time regularly and accidentally miss one payment, call your bank as soon as possible to see if it will offer one-time forgiveness, provided you pay in full at the time of your call. Your bank might refund your late fee and interest, but it isn't required to do anything.
While some credit card companies may mark your payment late after one day, those late payments are not reported to credit bureaus for 30 days, according to credit reporting company Equifax, If you act quickly to change your issuer's decision to mark your payment late, you could avoid damaging your credit score. If you're unable to pay your bill, you can also ask your issuer if it can create a payment plan for you.
Stop paying your credit card bill lateSarah Tew/CNET
Maxing out your credit cards
After payment history, the second biggest factor in determining your credit score is the percentage of available credit that you are currently using. Called the "credit utilization ratio," this factor is calculated by dividing the amount you currently owe by your total credit limit, or your maximum borrowing potential.
Maintaining a high balance on your credit card compared to your total credit limit will increase your total percentage of credit used and hurt your credit score.
You usually want to keep your credit utilization ratio under 30% for a good credit score, though less is better. A good rule of thumb is to use 10% of your total credit limit and pay it off each month so you're not carrying a balance. For example, if your credit limit is $5,000, you wouldn't want to borrow more than $1,500 and ideally $500 or less.
If you find your credit card limit is too low -- for example, the amount you want to charge to your card exceeds the total you can charge on a given card -- you can always ask your credit card issuer for an increase.
Maxing out credit cards could also cost you big money if you can't pay off the total by the payment deadline. "The higher your outstanding balance (the amount of money you owe), the more interest you'll pay, which can make it even more difficult to climb out of debt," McCreary said.
Making only the minimum payment on your credit card
Your minimum payment is the lowest amount that your credit card issuer will allow you to pay toward your credit card bill for any given month -- for example, $50. The minimum monthly payment is determined by the balance on your credit card (what you owe at the end of the pay period) and your interest rate. It's generally calculated as either 2 to 4% of your balance, a flat fee or the higher amount between the two.
Making only minimum payments is one of the most common credit card mistakes, according to Katie Bossler, a quality assurance specialist at GreenPath financial wellness.
Although making minimum payments on time is still far better than paying late or ignoring your bill, paying only the minimum can cause interest to build, making it much more difficult to pay off your balance completely.
For example, if you have a $2,000 balance with a minimum payment of $50 on a credit card with an APR (annual percentage rate) of 14.55%, it will take 56 months (or almost five years) to pay off your debt, and you'll end up paying a total of $753 in interest. However, if you make a plan to pay the balance off in a year, your payments would be $180, and you'd only pay $161 in interest.
It only gets worse as the APR goes up -- at a relatively high but not unreasonable rate of 25%, a minimum payment of $50 would take 87 months (or a little more than seven years) to pay off a $2,000 debt, with a sizable $2,344 in interest payments. Meanwhile, upping the monthly payments to the same $180 would pay off your debt in 13 months, and cost only $281 in interest.
Here's an example of how making more than minimum payments can save you significant money in interest.
How minimum payments lead to higher interest
|Credit card balance||Annual percentage rate||Monthly payment||Time needed to pay balance||Additional interest paid|
The best way to avoid paying any interest at all on your credit cards is to pay off your full balance each month. If you can't do that, Bossler, the quality expert from GreenPath financial advisors, suggests pausing use of the credit card while you're paying it off, and paying more than the minimum to do so.
Taking out a cash advance on your credit card
Withdrawing a cash advance with a credit card is a big mistake. "It's the most expensive way to pay for things," Bossler said. Cash advances are a method of borrowing money from your credit line to put cash in your pocket "now."
Convenient as it may be, a cash advance uses an interest rate that is typically significantly higher than your standard APR. Most cards will also include a transaction fee of 3 to 5%. "This is not the way to go," Bossler said.
If you receive a "convenience check" in the mail from a credit card company, be careful. It could be a cash advance offer that's best tossed in the recycle bin. If you need some extra cash, it might be better to think about starting a side hustle or taking out a personal loan with a lower interest rate. Budgeting apps can also help track your spending, so you can pull back on expenses that can wait.
Chasing credit card rewards with abandon
If you're thinking of opening a new credit card account to get money back on your purchases, you can best manage rewards by considering your lifestyle. Heavy travelers should look for a card with frequent flyer rewards. If you spend a lot of money on groceries or drive your car often, look for cash back rewards for spending at gas stations and grocery stores.
However, you shouldn't make spending decisions based on receiving rewards. "Credit cards shouldn't be used as a strategy for buying things," Bossler said. Many cards will require a minimum amount of purchases for special rewards, or a welcome bonus to tempt you into spending more than you can afford.
Credit cards with lucrative rewards can also charge higher annual fees, for example, $100 or even $500 a year. If you're not spending enough to earn that annual cost back in rewards, you might consider a card with no annual fee.
Credit card rewards can be a powerful financial tool when used wisely, but you'll need to be careful to avoid running up your balance. Thomas Nitzsche, senior director of Media and Brand at MMI, says he often sees people making the mistake of using credit cards for rewards while ignoring the growing interest on their balance. If you're chasing rewards at the expense of your budget, consider coming up with a plan to pay your balance down instead.
Your credit score can drop when you cancel your credit cards.Sarah Tew/CNET
Not paying off big purchases during a 0% APR period
Whether you just opened a 0% APR credit card -- which offers interest-free debt for a specific promotional period -- or a balance transfer card -- a credit card designed to accept debt from other cards -- make sure you read the fine print. Oftentimes, there's a fee to transfer your existing balance, commonly 3% of the balances transferred. Also, the introductory 0% rate only lasts for so long, typically between six and 18 months. That means you've got a limited time to pay off your balance before a higher APR kicks in. (When it does, your monthly interest gets a lot more expensive.)
To create a simple repayment plan, take the amount you owe and divide it by the number of months in your 0% APR promo period. Then pay that amount monthly to completely pay off your balance while you are borrowing without interest. For example, if you buy a $300 TV using a credit card with 0% APR for six months, making $50 monthly payments will eliminate your debt before the no-interest period expires.
Using a 0% intro APR credit card can be a good strategy to pay off your debt or finance a large purchase, but it can be risky, too. While disciplined borrowers can effectively roll balances into new accounts with 0% intro APR, Nitzche says that many people who transfer their credit card balances only make minimum payments, which can result in spiraling debt and damaged credit, leading to a point when they can no longer get approval for new accounts.
Canceling your credit cards
Even if you have paid down your balance on a credit card, there are two big reasons why you shouldn't cancel your account. Closing your account would affect your length of credit history and credit utilization ratio, two important components of your credit score. (Remember, your credit utilization ratio is the percentage of your total available credit lines across all cards you're using.)
If you close an account you're not using, your total available credit line shrinks, making your credit utilization ratio higher.
Canceling older credit cards will also shorten your credit history, leading to a significant drop in your credit score. If you do decide to cancel some of your credit cards, it's best to leave the oldest account open, as well as the one with the highest credit limit to maintain your credit utilization ratio and prevent any damage to your credit score.
It's important to note that with inactivity, credit card issuers may automatically close your account. To avoid this, Nitzche says that it's best to use each of your credit cards once in a while for small purchases.
Applying for too many credit cards
You may have heard this advice before: Don't apply for too many credit cards at once. Each time you apply for a new credit card, your credit score can drop slightly due to a "hard" credit check.
Hard credit checks require your consent and involve a full credit summary from a credit bureau. "Soft" credit checks occur when you view your credit report or a financial company requests a summary without your consent, and they don't affect your credit score. They're used for purposes such as preapproved credit card offers.
When you authorize lenders to pull your credit history, you'll see a "hard" inquiry on your credit report. According to credit score company MyFICO, a hard pull will lower your credit score by about 5 points. While it will stay on your report for two years, the deduction to your score will usually be eliminated within a year.
Too many hard pulls on your credit in a short amount of time -- for example, applying for five store credit cards in one weekend -- could affect your credit rating more, as multiple inquiries indicate higher risks of insolvency or bankruptcy. Experian suggests waiting at least six months between applying for new lines of credit to avoid lowering your credit score.
Applying for too many credit cards at once can drop your credit score.Sarah Tew/CNET
Not checking your billing statements regularly
How often do you check your monthly billing statement? It can be an eye opener to see how much money you really charge your credit card, especially if it's routinely more than you bring home each month.
Spending $20 here and there may not seem like a huge amount, but it can add up quickly. Remember that increasing your credit utilization ratio (your percentage of credit used) will lower your credit score and high balances will cost you more in interest. Plus, how do you know how much you've charged if you aren't tracking your spending?
Tracking your credit card spending isn't the only reason to check your billing statement. You should thoroughly comb through your transactions to make sure there aren't any potentially fraudulent charges you didn't make. The sooner you discover you're a victim of identity fraud, the sooner you can contact your card issuer to dispute the charges and take the necessary steps to secure your credit card account.
For more tips on using credit cards wisely, learn six ways to get the most from your credit card and how to pick the right credit card.