Say it with me: My New Year’s resolution is to cut down the number of mistakes I make in managing my credit card account. Wow, sure comes off the tongue smoothly. To cut to the chase, everyone makes mistakes with their credit cards, and these mistakes can cost money and/or lead to credit score damage. So, instead of making an amorphous promise to lose weight or learn something new, why not concentrate on avoiding the following five common credit card mistakes in order to make 2012 a happier year for your wallet?
1. Opting for rewards despite other needs
Everyone wants rewards, but rewards aren’t for everyone. If you have at least good credit and you pay your bill in full every month, then by all means focus on finding a rewards card that fits your spending habits. On the other hand, if you don’t have the requisite credit standing, you may want to find a no annual fee credit card in order to build credit cost-effectively and reach the credit standing required to get truly lucrative rewards. Finally, if you don’t always pay your monthly bill in full, avoiding interest with a 0% credit card may actually save you more money than getting a rewards credit card.
2. Unwittingly using an NPSL Credit Card
World MasterCard credit cards, American Express charge cards, and Visa Signature credit cards have at least two things in common: 1) They’re some of the most popular credit cards for people with excellent credit; 2) They all have a feature called No Preset Spending Limit (NPSL).
Contrary to popular belief, NPSL does not mean that you won’t have a credit limit. Rather, it means that your credit limit will be determined each month, and you will never know exactly what it is. Neither will the major credit bureaus because credit card companies typically do not report accurate limits to the bureaus (most likely to maintain the myth of the unlimited credit card).
The fact that you won’t know your credit limit increases the chances of having a big-ticket purchase declined at the point of sale. The fact that the credit bureaus won’t know means your credit utilization ratio may be misleading, which could lead to undeserved credit score damage. In most cases, NPSL simply isn’t worth the risk, but cards with this feature could offer the most attractive terms. The choice is ultimately yours to make, but it’s important to know the risks going into your credit card search.
3. Overestimating your credit card company’s interest in interest revenue
Would it seem logical for a credit card company to report your usage to the credit bureaus in such a way as to improve your credit score in return for you revolving a small balance each month and thereby providing extra interest revenue? Perhaps, but it’s not how things work. You’re not going to get preferential treatment by carrying a balance, but you are going to cost yourself money, so if you have the cash to pay your credit card bill, do so.
4. Thinking inside the box when it comes to small business credit cards
They’re called business credit cards, so they’re the type of credit card one should use for small business spending, right? Yes and no. While business credit cards and general-use credit cards aren’t as different as you might think – most issuers hold business credit card users personally liable for debt, and report usage to their major personal credit reports –business credit cards do not fall under the jurisdiction of the CARD Act. The CARD Act improved transparency as well as consumer rights by instituting new rules, such as that which prevents credit card companies from increasing interest rates on debt held on general-use credit cards unless you are 60+ days delinquent. Therefore, you should have a general-use credit card for purchases you won’t be able to pay off in full before the end of the month and a business credit card for all others.
5. Opting-in for over-limit charges despite past history
Opting-in isn’t necessarily a mistake because the freedom to surpass your monthly credit limit can be useful in an emergency, and the new credit card law (the CARD Act) has made over-limit fees more reasonable. However, opting-in isn’t worth it if you do it all the time, as even modest fees can quickly add up, and you don’t want to waste money. So, if you went over limit more than a few times a year before the CARD Act took effect in February 2010, it’s probably a good idea to remove temptation and simply not opt-in.
Everyone wants rewards, but rewards aren’t for everyone. If you have at least good credit and you pay your bill in full every month, then by all means focus on finding a rewards card that fits your spending habits. On the other hand, if you don’t have the requisite credit standing, you may want to find a no annual fee credit card in order to build credit cost-effectively and reach the credit standing required to get truly lucrative rewards. Finally, if you don’t always pay your monthly bill in full, avoiding interest with a 0% credit card may actually save you more money than getting a rewards credit card.
2. Unwittingly using an NPSL Credit Card
World MasterCard credit cards, American Express charge cards, and Visa Signature credit cards have at least two things in common: 1) They’re some of the most popular credit cards for people with excellent credit; 2) They all have a feature called No Preset Spending Limit (NPSL).
Contrary to popular belief, NPSL does not mean that you won’t have a credit limit. Rather, it means that your credit limit will be determined each month, and you will never know exactly what it is. Neither will the major credit bureaus because credit card companies typically do not report accurate limits to the bureaus (most likely to maintain the myth of the unlimited credit card).
The fact that you won’t know your credit limit increases the chances of having a big-ticket purchase declined at the point of sale. The fact that the credit bureaus won’t know means your credit utilization ratio may be misleading, which could lead to undeserved credit score damage. In most cases, NPSL simply isn’t worth the risk, but cards with this feature could offer the most attractive terms. The choice is ultimately yours to make, but it’s important to know the risks going into your credit card search.
3. Overestimating your credit card company’s interest in interest revenue
Would it seem logical for a credit card company to report your usage to the credit bureaus in such a way as to improve your credit score in return for you revolving a small balance each month and thereby providing extra interest revenue? Perhaps, but it’s not how things work. You’re not going to get preferential treatment by carrying a balance, but you are going to cost yourself money, so if you have the cash to pay your credit card bill, do so.
4. Thinking inside the box when it comes to small business credit cards
They’re called business credit cards, so they’re the type of credit card one should use for small business spending, right? Yes and no. While business credit cards and general-use credit cards aren’t as different as you might think – most issuers hold business credit card users personally liable for debt, and report usage to their major personal credit reports –business credit cards do not fall under the jurisdiction of the CARD Act. The CARD Act improved transparency as well as consumer rights by instituting new rules, such as that which prevents credit card companies from increasing interest rates on debt held on general-use credit cards unless you are 60+ days delinquent. Therefore, you should have a general-use credit card for purchases you won’t be able to pay off in full before the end of the month and a business credit card for all others.
5. Opting-in for over-limit charges despite past history
Opting-in isn’t necessarily a mistake because the freedom to surpass your monthly credit limit can be useful in an emergency, and the new credit card law (the CARD Act) has made over-limit fees more reasonable. However, opting-in isn’t worth it if you do it all the time, as even modest fees can quickly add up, and you don’t want to waste money. So, if you went over limit more than a few times a year before the CARD Act took effect in February 2010, it’s probably a good idea to remove temptation and simply not opt-in.
This guest article is from the editorial department at Card Hub, a leading marketplace for credit cards, prepaid cards, and gift cards.
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