I was going through the mail and opened up a credit card statement. Missed payment fee of $25? On a $89.47 bill? Ouch! I had just made an expensive mistake, one of many credit card mistakes I’ve made in the 30 years since I got my first Visa.
Credit card mistakes make life more convenient, but they can devastate your finances by adding debt without adding significant assets. Have a mortgage? You probably have a house. Have a car loan? You probably have a car. Have credit card debt? You might have a closet full of clothes, or even missing memories from too many wild nights.
In other words, credit cards need to be approached with caution. Lots of personal finance folks like Dave Ramsey caution against using credit cards for any reason.
People do use credit cards, though. According to the Federal Reserve, Americans held over $950 billion in credit card debt in April 2016. While many Americans struggle to manage credit card debt, others manage credit card use responsibly and benefit from rewards programs and other benefits.
I like to think I use credit cards responsibly now, but that hasn’t always been the case. I spent my early 20’s digging myself into credit card debt, and my late 20’s digging out and reestablishing my credit. I made a bunch of credit card mistakes. I paid a bunch of fees and interest. I learned how to manage my risk, and to only make charges when I had the money in the bank to back it up.
Yet I still missed a payment and incurred exra fees and interest. I made a silly mistake that with a couple of simple adjustments I would have avoided.
In retrospect, all of my mistakes could have been avoided. So I thought I’d confess to my credit card fails, so that you don’t have to make them. because credit card mistakes can be costly.
The College Mistake: The Balance Builds Up
Like a lot of kids in the 1980s I got my first credit card as a college freshman. At first, I was really good about paying my balance off each month.
And then I had car trouble and a big bill to pay.
I put the repair on the card, and I didn’t pay it off entirely. I paid part of it and kept on charging like normal. Only now I was paying compound interest too. The balance fluctuated, but it was going to be a long time before it went away entirely.
I should have stopped charging anything and concentrated on getting back to a zero balance. I should have adjusted my budget to account for paying off the card and paying for future car maintenance.
Instead, I just kept merrily spending and paying a convenient amount that didn’t cause me to change any of my behavior.
- A credit card is not an emergency fund or a budgeting tool. If you need to use your credit card to pay for a need, you probably need to adjust your savings and budgeting approaches.
- Don’t carry a credit card balance. If you do run up a balance, stop making additional charges and prioritize paying off the card.
The Early 20s Mistake: Minimum Payments and A Big Balance
My merry spending and lack of budgeting led more credit card mistakes.
I had more expensive car repairs that I didn’t pay off. My unhappiness with my chosen career path in political science led to spending on frivolous distractions, like boredom shopping on credit.
I accrued bigger balances, but I paid on time. My credit card company rewarded me with a raised credit limit, even though my income was unchanged.
Eventually, my credit card balance overwhelmed me. I owed more than I made over the course of a few months. I started making minimum payments and my balance got larger each month.
Then I dropped out of grad school and lost my stipend. I struggled to figure out my next step, but I had a big credit card balance and no way to pay it. I fell behind. Eventually I landed a couple of jobs and began paying it down, but not before I was in collections with bad credit.
- If you have a credit card balance, make sure you always pay more than the minimum. Paying minimums can allow your credit card balance to grow even when you aren’t making purchases. You’ll end up paying more interest and having a balance much longer.
- Your credit allowance may exceed your ability to pay. When your credit limit gets bigger though your income stays the same or shrinks, it’s important not to inflate your credit usage. Keep your credit card bills within the realm of what you can reasonably pay off.
- Avoid boredom shopping and other frivolous uses of money when your income situation is insecure. If you are unhappy with your situation, saving money and putting yourself in a better financial situation will help you change it for the better. Spending extra puts you at a lot of risk.
More Credit Card Mistakes
It took a while to pay off my credit cards and reestablish credit. I didn’t have a credit card for the latter half of my 20’s. By the time I got another card, i was a lot more careful, and my mistakes didn’t pose as much danger to my financial well-being.
I kept my balance under control and didn’t carry a balance for more than a month or two. I limited
Let’s admit to a couple of mistakes, though.
I carried all of my credit cards all of the time, including on vacation. When my purse got stolen on a drive to Florida, that became a problem. All of a sudden i was desperately searching for phone numbers and account numbers to cancel cards. In retrospect, two of those cards (particularly the company card I was never going to use that week) should have been locked in a desk drawer at home.
After that incident, I let the credit card company talk me into credit monitoring services. I spent $7 a month for a couple of years for something I now know I can get for free.
I didn’t always check my statement as carefully as I should. I ended up paying a couple of mysterious iTunes charges because I didn’t challenge them on time.
While none of these mistakes torpedoed my credit, I could have avoided all of them.
- Don’t carry credit cards you don’t need, particularly on vacation.
- Credit cards will try to sell you add-ons and extras. They are rarely good deals. Even if something sounds like a good idea, make sure that you are getting it from the best source.
- Check your statements carefully. You have a limited window to challenge fraudulent charges. Once that time period is over, you have to pay.
My Latest Credit Card Mistake: A Lost Statement
Last month, I looked at Little Bit and noticed that she was wearing fleece pajamas in May.
“Why are you wearing those? It’s kinda hot for those. What about your rainbow nightgown or those minion pajamas with the shorts?”
“They’re in the dirty clothes.”
Hmm…I thought back in my head and realized Little Bit had grown out of most of her summer weight pajamas the previous summer. Darn kid keeps growing! I got her to change into a t-shirt to sleep in that night and the next day we went shopping for PJs and shorts.
I use the same credit card for almost everything, an Amazon Rewards Visa. It makes life simpler and gives me points I can use to help fund my Christmas shopping. For this one department store which will remain nameless today, though, I use a store credit card.
I generally don’t open or use store credit card accounts, but this one provides really good discounts for cardholders. I use it two or three times a year, take the discount and pay off the card when I get the statement.
I didn’t get the statement.
We vacationed at beach for a week at the end of the month and had our mail held. By the time we got back, the post office delivered a pile of mail a foot high. Either the bill got lost in the pile or never made it out of the post office, but I never saw the May statement.
It didn’t raise a flag. I only get statements when I use the card, so I wasn’t suspicious when we got home and I didn’t have a statement. I wasn’t tracking the billing cycle, and I lost track of when I should have gotten a bill.
And then I forgot. Kind of. I still looked for the bill in the mail daily. On at least one occasion, I thought about taking my card and a checkbook to the store and paying off the card.
Yeah, I didn’t do that. I didn’t call the account number to check the status. I didn’t go online to check the account..
So I wasn’t entirely surprised when I got the June bill and saw the missed payment. I was disappointed in myself for not acting on my suspicion that not all was hunky dory in the land of credit cards.. I was frustrated that whatever savings I’d gotten from using the card had been eaten up by fees and interest.
- Keep track of your billing cycle and charges. While I track my spending, I wasn’t tracking the billing cycle for the card. Card payments are supposed to be due on the same day each month, give or take a weekend. I should have known that for a charge made on the 15th, I would be billed by the end of the month. That knowledge should have prompted me to take the three minutes to check on the bill.
- If you do miss a payment, pay as soon as you know. While late payments are one of the biggest hits on your credit score, most creditors won’t report late payments if you pay before the next due date and usually pay on time. That doesn’t mean they can’t, though, and it will be a few weeks before I know if my credit score was affected.
- Sign up for email notifications. I immediately changed my billing preference for the card from paper to online. I did this with my main Visa, and probably should do so even with the other cards I never use. I monitor my email closely and it’s unlikely that I’ll overlook or miss an emailed bill.
A Manageable Risk
Having and using credit cards adds risk to your financial health. Even people who try to act responsibly can find their credit scores compromised or accrue extra expenses through fees and interest.
As I have so (not) cleverly demonstrated, credit card mistakes can be pretty costly. Heck, on a percentage basis, I’m paying an additional 30% for kid’s clothes because I overlooked a single payment.
It doesn’t take long for a few minor errors on your part to blow a hole in your budget.
Big errors, like running up bills you can’t pay, can take years to overcome and derail your other financial goals.
To manage your risk, you need to be smart and careful about how you use credit cards and how you pay credit card bills. Know what to do, know what not to do, and try not to learn lessons the hard way.
Leave the errors to me.
What credit card mistakes have you had to learn? What tricks have you developed to avoid making costly mistakes?
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“Excited Female Cutting Her Credit Card” Image courtesy of stockimages at FreeDigitalPhotos.net, with changes.