7 Possible Credit Pitfalls and How to Avoid Them

By Eric Rosenberg
Published on: 07/18/2019

No one signs up for a new credit card expecting to get into debt they can’t afford to pay their way out of, but it happens often. It’s easy to make a laundry list of mistakes with your money if you don’t pay attention.

Keep your focus on these common credit pitfalls to avoid them in your own personal finances.

1 - Temptation to overspend

One of the most common problems with credit cards is a self-inflicted one. While credit cards make it very easy to spend up to the credit limit, it doesn’t mean we should do so. Not only is that bad for your credit, maxing out your credit cards is also probably out of your budget to pay off.

It’s important to know your habits and stick to a budget if credit cards are part of your regular spending plan. Don’t rush out and buy that new TV, designer accessory, or fancy new gadget just because it’s within your limit. Only buy what you can afford to buy with cash.

2 - Not paying off cards in full

If you pay off your credit card statement balance in full by the due date, you don’t have to pay any interest. If you use a card right, you’ll never pay for anything outside of an annual fee. But if you pay just the minimum balance or leave any portion unpaid, you’ll pay interest at the card’s annual percentage rate (APR).

Credit cards often charge 20% or more in interest. This is a huge cost that shouldn’t be taken lightly. You don’t get anything back in return for credit card interest. If you’re not careful, you could find yourself paying for that TV or vacation several times over in interest costs.

3 - Late and missed payments

It takes years to build an excellent credit score and only a few small mistakes to ruin one. The biggest factor in your credit score is your on-time payment history. Just one late payment can do serious damage to your credit. That’s why you should do everything you can to pay by the due date every month.

Automatic payments are an easy way to avoid missing a payment date. I have several cards, and I use some of them just for some smaller subscription costs to keep them active. Those accounts are all on auto-pay so I never have to worry. I pay off my primary credit cards weeks before the due date but do so manually to avoid accidental overdrafts due to payment timing.

4 - Privacy concerns

Financial companies are required to send you privacy statements each year. When you read them, you’ll find that the bank or lender can share your contact information for partnerships with other companies. That might mean selling your name and address for advertising.

You usually have the ability to opt-out of some sharing, but not all. And you usually have to jump through a few hoops to do it. Changes on your credit report may also increase your credit-related junk mail, which puts you at some risk for identity theft if someone steals your mail.

Make sure to opt-out where you can and consider calling to get your name off of lists to increase your information privacy. Also, learn how to read your credit report.

5 - Changing minimum payments

Installment loans give you a fixed, predictable monthly payment. That’s true here at Self as well as with the most popular types of mortgages, auto loans, and student loans. Some loans, like credit cards and some home equity lines of credit, may have a different payment amount every month.

Revolving credit accounts give you the ability to add to the balance and pay it back off repeatedly. If you pay the account off in full every month, you can avoid interest.

But you will also see a different bill amount that isn’t always predictable unless you stick to a tight budget. If you carry a balance, your payment can change with market interest rates. The cost of carrying a balance is another motivator to keep the account paid off.

6 - Harder to pay off than you expected

If you have a credit card, you might want to use it for a splurge purchase just once. But if that one time is for a large purchase, you may find it harder to pay off than you realized. This is even worse with ultra-high-interest debt like payday loans.

Credit cards, and many payday loans, give you the option to pay off a purchase over time. This can be useful for managing cash flow. Credit can also help you navigate a job change or temporary financial strain. But paying off a balance when you are already on a tight budget can be a real financial hardship.

7 - Fees

Finally, be on the lookout for fees. Credit cards can charge annual fees, late payment fees, returned payment fees, cash advance fees, balance transfer fees, overbalance fees, foreign transaction fees, and other charges. Other than from annual fees, you can avoid just about any fee your card charges.

Make sure to read the fine print and avoid paying more than necessary. Annual fees on rewards cards can be worthwhile if you get more in return than the cost. However, if a card charges more than you get back in cash back, miles, or points, you should consider downgrading to a no-fee card or closing the account.

Not using credit can be bad for your credit

While it may seem counterintuitive, it takes credit to build good credit. You don’t have to use an account every month for it to help your credit. Just having it open and in good standing helps your credit score over time as long as you keep the balance low.

If you don’t have any accounts, you won’t have a credit score at all and will find it very difficult to get approved for something like a mortgage or auto loan. Lenders want to see a history of responsible credit management before they’re willing to give you a big loan. And if you can get it, someone with little credit history will struggle with bad rates.

That’s another place Self can help. Unlike a traditional loan, you can open a Self Credit Builder Account with no history. If you make the regular payments each month, you’ll end up with a positive savings balance and a year or two of payment history added to your credit report.

Even if you’ve struggled in the past, credit is a major part of your personal finances. Work hard to establish a positive credit history from this day forward. Along the way, be sure to avoid these common credit pitfalls.

About the author

Eric Rosenberg is the mastermind behind the Personal Profitability blog and podcast. He has both an undergraduate degree and a MBA in finance and his work has appeared in various media outlets.

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Written on July 18, 2019
Self is a venture-backed startup that helps people build credit and savings.

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