Credit cards are effective tools to build up credit and pay for expensive items, among other things, but you could end up losing money and paying more fees if you don't keep an eye on specific blunders that most cardholders make every now and then. These mistakes run the gamut from late payment and maxing out credit limits to making the minimum payment, chasing teaser rates, and raking up excessive annual fees and foreign transaction charges.
Pay Your Bills on Time
Pay all your bills on time, even if it means making the strict minimum payment in months when your budget is tight. Failure to pay bills on time might prompt the credit card company to rake up fees. Talk to your lender to understand terms and conditions of your credit card agreement as well as to determine penalties for late payments.
Don't Overdo Balance Transfers
Don't fall for the tempting balance transfer offers that your existing credit card companies – and others you don't currently deal with – frequently flood your mailbox with. Read the fine prints closely and compare your current rate with the offered rate, taking into account the balance transfer fee associated with the offer. Use the FICO Score Simulator to determine how a balance transfer will ultimately affect your credit score and whether it might be better to wait.
Pay More than the Minimum Amount Required
Don't make just the minimum payment shown on your credit card statement. Add to that amount a few extra dollars to save on interest, pay the balance off sooner, improve your credit score, get ready for a mortgage, and increase your available credit in the long term. If you simply make the minimum amount, you could end up paying more money in finance charges. Check Bankrate.com's Credit Card Calculator to determine the true cost of merely paying the minimum amount every month.
Don't Max Out Your Cards
Lenders keep a close eye on card usage, which is the total card balance divided by the credit limit granted. Also, amounts owed count for 30% in your credit score, so maxing out your credit cards increases your card usage and, thus, reduces your credit score and creditworthiness.
Pay Close Attention to Monthly Statements
Take a close look at your credit card statements at the end of each month to detect potential errors, including fraudulent transactions. The last thing you want is to end up paying hundreds, if not thousands, of dollars in unauthorized transactions that someone somewhere in the country has charged to your card. Responding early to a fraudulent charge is important because the law says that you're only liable up to $50 in unauthorized charges if you report the loss within two business days after you learn about the loss or theft of your card. The liability amount goes up to $500 if you report the unauthorized transaction after 60 days.
Don't Take Cash Advances
If possible, avoid finding yourself in a situation in which you'd need to take a cash advance. The economics of a cash advance are not in your favor because it generates several fees, including the transaction fee; a higher annual percentage rate that is higher than the APR you'd pay on regular purchases; and the lack of an interest-free period because cash advances start accruing interest from the date of withdrawal. Bank of America advises clients to use cash advances wisely to save money down the road and avoid fees that might add up to or exceed the initial cash advance.
Eliminate Cards with Excessive Annual Fees
Take a periodic look at all your cards and distinguish them by APR, benefits and credit limit, among other factors. Then figure out whether it makes sense to consolidate balances on higher-rate cards and transfer them onto lower-APR cards. That way, you not only save cash in lower interest payments but also free up debt, which is a good thing for your credit score and creditworthiness.
Keep an Eye on Your Credit Score
Review your credit report periodically to ensure there's no mistake from an existing lender or misrepresentation from an institution you've never dealt with. By law, you're entitled to a free credit report each year. Contact each of the top three reporting agencies – Experian, TransUnion and Equifax - via email, phone or fax. Visit the agencies' website to learn more about their respective procedures. If you find a mistake on your credit report, you can fix it by sending a letter to the reporting agencies, contact the institution responsible for the mistake, or even file a complaint with the Federal Trade Commission.
By following a specific set of rules, you can reduce your credit card fees, live within your means and ultimately increase your credit score. Improving your credit score goes hand in hand with avoiding credit card mistakes as varied as late payment, disregarding monthly statements, taking cash advances and paying too much for foreign transactions fees.