Getting your first credit card can feel like a rite of passage into adulthood and can help you establish credit. But along with it comes big responsibility -- one misstep with a credit card could have serious and lasting effects on your finances, such as a damaged credit score or even long-term debt. According to a recent Qualtrics / Credit Karma study, 54 percent of young adults racked up debt on their credit cards that they were unable to pay off within a year.
If you're thinking of getting your first credit card or are new to the world of credit cards, learn about five common credit card mistakes to avoid.
1. Only making the minimum payment each month.
Credit cards can get you in trouble by giving you the ability to buy now and pay later, and it can get confusing once your bill is due. On your statement, you may see two payment options: the minimum payment or current balance.
You may see a much smaller amount due under "minimum payment" and naturally think it's the best option for you. However, only making the minimum payment on your credit card balance can lead to additional interest and debt. For example, if you have a $1,000 balance on your credit card with a 15 percent interest rate, making minimum payments of $25 would result in you paying almost $400 in interest. Not only that, but it would also take you more than four years to pay it off. Your current balance is how much you owe on your credit card, while your minimum payment is just that -- the very minimum due.
It's a good idea to pay off your balances in full each month and avoid minimum payments if possible. "(New credit card holders) often charge purchases they can't afford until their cards are maxed out, slowly increasing debt until they can't make even the minimum payments," says Joshua Firestone, certified credit counselor at ClearPoint Credit Counseling Solutions.
If you're a new credit card user, keep tabs on your balance and work toward paying off your balance in full each month.
"Think about the fees you would pay and what you could spend that money on instead as a motivator. $25 per month added to a savings account, not including interest, adds up to $300 per year!" says Katie Gampietro Burke, Certified Financial Planner™ of Wealth by Empowerment.
2. Thinking you need to carry debt to build credit.
Not paying off your balances because you think you need to carry debt to build credit? This is actually a myth.
New credit card users should try to pay off their balances in full, but also keep balances below 30 percent of their credit limit. Your credit utilization -- or how much of your total credit you actually use -- typically makes up a portion of your credit score.
"Carrying a high balance from month to month can be devastating to your credit score" says Burke.
3. Taking out a cash advance.
We all love to carry around a little extra cash, and if you're a new credit card user, you may be tempted to take some out through a cash advance. Cash advances allow credit card users to borrow a certain amount of cash from their credit limit by using their credit card at an ATM or bank.
While it may seem like an attractive option to get quick cash, interest rates on cash advances can be double your standard interest rate in some cases. Not only that, but cash advances also typically have additional fees. For these reasons, you may want to avoid cash advances at all costs. Start building an emergency buffer so you can pay for things with your own hard-earned cash, not cash borrowed from your credit card.
4. Not looking at the fine print.
Credit cards can come with lengthy terms and conditions filled with confusing language that may be hard to understand for new credit card holders.
However, it's important to read the fine print to truly understand what you're getting yourself into. Try answering the following questions if you're getting a credit card:
- What's the interest rate?
- Is there an annual fee?
- When is my first payment due?
- What's my credit limit?
- What are the interest rates on a cash advance?
- Are there any other fees?
- How do I make a payment?
Knowing the fine print can save you from unwanted surprises or future mistakes. If there's any confusion, consider looking on the credit card issuer's website under FAQs and calling customer support.
5. Making late payments.
Using a credit card can help you establish credit and make paying for things a bit easier. However, it's important to make on-time payments each and every month. The Qualtrics / Credit Karma study found that over 40 percent of young adults missed payments on a credit card or loan before they turned 30.
Your payment history is an extremely influential factor in your credit score, and just one late payment could damage your credit. A late payment could result in late fees (typically capped at $25 for the first incident) and higher interest rates -- and may even go on your credit report if your payment is more than 30 days late.
To ensure you make on-time payments, sign up for online alerts and reminders. Another option is to sign up for automatic payments, so you never miss a payment. This can be a foolproof option, so long as you have sufficient funds in your account to pay it back. If you have insufficient funds, you may be hit with an overdraft fee of around $35. Avoid this mistake and make on-time payments to keep your credit in good shape.
Credit cards can be great tools to establish credit and show future lenders you are creditworthy -- however, having a credit card is a huge responsibility that must be taken seriously.
"The biggest mistake is not having a plan -- saying 'I'll figure it out later' -- that's when you get yourself into trouble," says Burke.
New credit card holders should start off slowly, spending on what they need and can afford in addition to making on-time payments.
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