For many of us, credit cards are a natural part of our financial lives. We use them to make everyday purchases at the grocery store, gas station and restaurants. Then we use the rewards we earn to cash in on travel deals and gift cards. While all of this is well and good, there are a few ways you could unknowingly be using your credit card wrong.
1. Carrying a monthly balance to build credit.
Source: Shamrock Financial
According to a survey done by Nerd Wallet, about 50% of Americans don’t know that carrying a balance on their credit card from month-to-month doesn’t help raise your credit score. So if you’re carrying a monthly balance on your credit card in order to build a good credit history, you’re doing it wrong.
Charging a small amount of money every month, and then paying off the entire balance actually builds credit much better than carrying a balance. In fact, the only thing you’re doing every month is paying loads of unnecessary interest charges. So opt out of this myth and start paying off your entire balance every month.
2. Paying household bills.
Although it’s against the law for retailers to pass along the credit card surcharge to the customer, some government or private agencies don’t follow this rule. For example, when you pay your electricity bill with a credit card, you’re probably paying an additional fee to process this transaction.
These surcharge fees can range from $1 to upwards of 2.9% of the entire amount, which could be hundreds of dollars in the end. To avoid these added surcharge fees when paying household bills like your utility bills, opt for a direct transfer from your checking account or use a debit card.
Some retailers also offer a discount if you pay with cash or check, as a way of avoiding these credit card processing fees themselves. It’s a good idea to ask if you can get a discount for paying with one of these methods, versus using your credit card simply to receive the cash back rewards.
3. Withdrawing cash from an ATM.
While you can withdraw cash from an ATM using your credit card it’s not a financially wise move. Most credit card companies impose a higher cash advance fee, sometimes as much as 5%. Plus, a cash advance isn’t subject to the 30-day grace period like your regular credit card charges are, so you’ll always be charged interest.
On top of this, you’ll likely pay an ATM surcharge fee, unless you’re able to find an ATM that’s within your credit card company’s personal network. In almost all cases, it’s a better idea to get cash from an ATM using your debit card versus paying the high cash advance fees that comes with your credit card.
4. Swiping your card just for the rewards.
It’s no doubt that utilizing a credit card for it’s rewards can be incredibly valuable. But it’s also easy to get into the mindset of swiping the card just for the rewards it offers. Even the most valuable credit card benefits packages award customers with 1-6% in cash back rewards, while the interest you’ll pay for these purchases is between 10-25%.
Doing the math you’ll quickly see that using your credit to purchase something only for the rewards is not always a good strategy if you’re unable to pay off the balance in full. You’ll end up paying way more fees in interest charges than the potential rewards you could earn.
5. Maxing out your card’s spending limit.
Another myth when it comes to managing your credit cards responsibly is maxing out your card’s spending limit simply because you can. This can actually be damaging to your credit history. In order to build a healthy credit history, experts recommend that you utilize 30% or less of your entire spending limit balance.
This is called the credit card’s utilization ratio, and it basically measures the amount of available credit against the amount you’ve charged. For example, if you have a credit card with a $10,000 credit limit your goal is to use up $3,000 or less of the entire balance. Essentially, credit card companies and other lenders want to see that you’re using credit responsibly and not spending every single dollar you’re allotted.