Getting your first credit card is a financial milestone. Your credit card can become an essential tool that builds your credit and helps you manage your money. But too many credit card rookies have gotten in trouble with debt and fees, while others simply miss out on important benefits. (See also: What You Need to Know Before Getting Your First Credit Card)
If you are about to apply for your first credit card, or are already using it, be careful not to make these six common mistakes.
1. Failing to Read the “Fine Print”
Getting a credit card is an important financial decision, and you need to read the details before choosing one. Thankfully, the most important terms and conditions of credit cards aren’t even written in fine print anymore. By law, credit card offers must show all of the interest rates and fees in a standard format and in large print, in what’s called the Schumer Box. And while you don’t need to hire a lawyer to go over every single sentence, you should understand the interest rates being charged and all of the fees you could incur.
2. Applying for the First Offer Without Comparing Interest Rates
When you are considering a credit card offer, you should take a close look at the standard APR (annual percentage rate) for purchases, and compare it to competing cards. Interest rates vary widely from card to card. If your account ever carries a balance (as more than 40% of all credit card accounts do), it’s important to have the lowest possible interest rate. (See also: Best Low Interest Credit Cards)
3. Signing Up for a Premium Rewards Card
Just as you wouldn’t want a novice driver to have an expensive luxury car, it’s not a good idea for a first-time credit card user to have a premium rewards card with a large annual fee. As a newbie user, you are unlikely to use all the benefits that account for the annual fee. It’s better to look for a basic card that will let you build credit with no annual fee. (See also: Best Credit Cards for Students)
4. Missing Payments
The primary way that credit cards differ from debit and prepaid cards is that you have to make a payment every month. If you fail to make at least the minimum payment on time, every month, then you will usually be faced with a much higher penalty interest rate, along with late fees. And when you repeatedly pay late, your credit will suffer severely.
On the other hand, you can quickly build excellent credit with a steady record of on-time payments. To make it easier to remember, sign up for email, phone, or text reminders of your due date. For even more assurance that you’ll pay on time, sign up for auto-payments that clear your balance every month. Just be sure to look at your statements to make sure there are no fraudulent charges.
5. Making Just the Minimum Payment
It can be tempting to pay just a little each month, but it will cost you dearly over time. The best way to use a credit card is to avoid interest charges by paying each month’s statement balance in full and on time. But if you absolutely can’t do that, then you should try to pay as much as possible, as early as possible. Most credit cards charge interest based on your average daily balance, so the sooner you can make a payment, and the more you can pay, the better. If you feel like you need a nudge to stay out of debt, you may consider a charge card, which has to be settled at the end of every month.
6. Missing Out on Benefits
Besides being a convenient way to pay, most credit cards come with a lot of perks, just for having the account. For example, you can receive free rental car insurance with most credit cards, but only when you use your card to pay for the rental and decline the optional coverage that the rental company offers. Other perks featured with many credit cards include extended warranty coverage, price protection, and purchase protection against theft and accidental damage. (See also: Awesome Credit Card Perks You Didn’t Know About)