By Andrew Housser
Credit cards can be convenient, relatively secure, easy to use, and some even pay you back with rewards. But sometimes, those small rectangular pieces of plastic can spell trouble. Most consumers already know it is important to use credit cards wisely. Yet a misstep can result in unneeded, unwanted debt. Watch out for these common pitfalls as you use your credit card.
1. Cashing credit card checks.
It might seem like a good idea to use a check issued by your credit card company to pay off debt or make a big purchase you've been putting off. Here's the catch: Credit card companies consider these checks to be the same as taking out a cash advance. Most creditors charge higher interest rates and special fees on cash advances. The best thing to do with these checks when they arrive in your mailbox is simply to shred them.2. Making new charges on a card you opened for a balance transfer.
Transferring debt from a high-interest credit card to one with lower or no interest can be a smart move in many cases. It then can be tempting to use this new, lower or zero-interest card to make new purchases. But if you do not pay off the full amount when your promotional deal ends, you'll be paying a high interest on the balance transfer plus the new purchases. Instead of lowering your debt, you will have added to it.3. Treating credit cards like an ATM.
Withdrawing $100 every now and then from your line of credit might not seem like much. But credit cards charge steep rates on cash advances -- as much as 25 percent or even higher. And that rate goes into effect the minute that cash hits your hand. Think of it this way: If you took out $100 a month for a year ($1,200) at 25 percent interest, you would owe an additional $169 in interest. In addition would be fees for the cash advances of as much as 4 percent, or $48. That's a total of more than $200 in fees in one year.
4. Losing at the rewards game.
Some people choose a credit card for its rewards program, which may allow them to earn airline miles, cash back, gifts or other items. The problem is that you may need to make a lot of charges to earn anything of significance. Plus, many rewards cards (especially ones from airlines and hotels) charge an annual fee and hefty interest rates. If you're not careful, those so-called freebies could cost you in the long run. Rewards cards can be helpful -- just make sure to read the fine print and weigh the decision to obtain one carefully.5. Forgetting about free credit card perks.
One of the biggest benefits to making purchases with a credit card is that most creditor companies offer free extras like extended warranties, purchase protections and rental insurance. Make sure to keep track of which card you used to make a large purchase, such as a computer or refrigerator, to take advantage of this coverage should you need it. Keep a copy of the charge slip with the warranty and other information, and note the terms of any extra protections on the paperwork.6. Being more than 60 days late with a payment.
No matter how tight cash flow is, pay some amount on your credit card bill. Companies can charge hefty penalty rates if you go more than 60 days without making any payment at all. Your 12.99 percent APR can skyrocket to 29.99 percent, and that new rate will apply to your entire balance, not just new purchases. If you don't have the ability to make even your minimum payment, begin looking into debt relief options.
7. Ignoring interest rate increases.
The Credit CARD Act of 2009 requires credit card issuers to notify you when they're going to increase your interest rate. Even though you will not be charged the new rate for 45 days, that rate actually goes into effect 14 days after the postmark date of the mailed notice. That means the new rate applies to any purchases you make after the 14th day. If you receive notice of a rate hike, call your credit card company to see if you can negotiate a lower rate.
All it takes is a few slip-ups to create long-term credit problems. Fortunately, many credit card mistakes are preventable as long as you pay attention to the fine print, spend within your means and budget wisely, and seek help when you encounter economic difficulties.
Andrew Housser is a co-founder and CEO of Bills.com, a free one-stop online portal where consumers can educate themselves about personal finance issues and compare financial products and services. He also is co-CEO of Freedom Financial Network, LLC providing comprehensive consumer credit advocacy and debt relief services. Housser holds a Master of Business Administration degree from Stanford University and Bachelor of Arts degree from Dartmouth College.