Common credit card mistakes and how to avoid them

Credit cards can be invaluable when used wisely. They can help us take advantage of limited-time opportunities and manage unexpected expenses. But many people can end up struggling with unhealthy credit card balances and debt, so we’ve put together a list of some of common credit card mistakes and ways to help avoid them.

The first mistake many people make is choosing the wrong type of credit card for their needs. To avoid this mistake, make sure you understand the various types of credit cards and what they’re generally suited to.

• Balance transfer credit card. These cards offer lower interest rates when you transfer a debt from another card. They can often help with debt consolidation or repaying debt more quickly, but if you don’t repay the debt by the time the transfer period finishes, you may end up paying higher interest and more in the long run.

• Reward credit card. These provide points as a reward when you spend. They may also provide exclusive perks. These may be more suited to people who are willing to pay to make their lives easier.

• Frequent flyer credit card. These provide flight-related rewards and are usually more suited to frequent travellers.

• Cashback rewards credit card. Provide a cash back reward when you spend on eligible purchases, usually in the form of points that can be converted to cash.

• No-annual-fee credit card. These may suit people who don’t use their card very often and pay off their balance before the due date.

• Low-interest credit card. They may be cheaper to service than rewards cards and may suit people who are looking for a cheaper credit card and don’t always pay off their debt in full before the due date.

• 0% purchase credit card. These don’t charge any interest on purchases for a limited time.

• Black credit card. These are ultra-premium rewards cards. They often have high interest rates that could make them expensive if don’t pay your balance each month, along with higher fees. They often offer higher credit limits and benefits like rewards points and a concierge service.

Another mistake many people make is forgetting about a card’s fees. For example, withdrawing cash from a credit card will usually attract a higher interest rate and may attract additional fees.

You can avoid this mistake by examining the terms and conditions in detail and creating a summary that includes the key fees and charges for future reference.

Each month or billing statement period, you can choose to:

• Repay your debt in full
• Make the minimum repayment
• Make your minimum payments plus whatever else you can afford

If you don’t repay your balance in full, it’s called carrying your balance forward, and is likely to result in paying more interest.

You can generally minimise your interest repayments by only spending what you can repay in full quickly, so you don’t carry a balance forward from month to month.

Most credit card companies will charge late payment fees if you don’t pay your minimum repayment by the due date. If you’re really late in paying or continue to do it, it can be recorded on your credit report which hurts your credit score.

You can try to avoid this by setting up payment reminders to ensure you make at least the minimum repayment each month. If your credit score has already taken a hit, making payments on time, especially if it’s more than the minimum, can help improve your credit score.

If you withdraw cash from your credit card via an ATM, or if you transfer cash from your credit card account to another bank account, that’s a cash advance. They usually attract fees and a higher interest rate.

Some credit card users can unknowingly make a transaction that attracts a cash advance fee. For example, if you use your credit card to pay for gambling, the transaction will be considered a cash advance rather than a purchase, while some lenders charge cash advance fees for BPAY bill payments.

You can try to avoid these fees by only using your credit card to pay for products and services. Always check your terms and conditions for other transactions that may be charged as a cash advance.

Some credit card issuers will deny transactions that exceed a card’s credit limit. Others will charge a fee. You can avoid paying over-the-limit fees by keeping careful track of your transactions and card balance.

If you find you’re struggling to get your debt under control, it’s important to reach out to your lender to let them know and see what steps they can help with. Alternatively, there are financial counselling services who support people struggling with debt.

Applying for too many credit cards over a short period may damage your credit score. A lower credit score can make it harder to get a loan and possibly increase the interest rate lenders charge.

If you max out your card, it’s usually a good idea to pay off that debt before using more credit. Or, if your financial situation and requirements means you require and can pay off more credit, you might consider submitting an application for an increased limit on your existing card.

Some people may end up with unhealthy credit card debt because they don’t choose their credit card carefully. When a card doesn’t suit your goals and financial situation, you may end up paying more fees, experiencing suboptimal benefits, hampering your ability to take out other loans or damaging your credit score.

One option is to compare a range of different credit cards before applying for one. You can use our guide to comparing credit cards which could help.

Often excessive credit card debt can be traced to poor spending habits or a failure to understand a card’s terms and conditions. If you don’t understand something in a card’s terms and conditions, you might find some answers in our credit card comparison page. If you still require more information, you can ask a financial expert or the lender.

So, to help ensure this doesn’t happen, plan out what you’re looking for in a card before you apply. Are you looking to choose a card with low fees and charges? Or is it something to help you make the most of a range of credit card benefits? What is a manageable credit limit for your situation? Asking yourself these questions and many others before applying for a card could help save you in the long run.