Your 20s can be an awesome and awkward time of your life. You’ve finished school and you’re now starting to work full-time. You’re an adult! The problem is, they don’t exactly teach you money management in school, so it can be pretty easy to start making some serious credit card mistakes.
Credit cards are an important tool and a part of life. When used responsibly, they’ll help you manage your finances. However, if you abuse them, you could quickly find yourself in some serious debt. The following credit card mistakes could wreck you financially, but if you take care of them now, you’ll put yourself on the right path.
Making only the minimum payment
If you weren’t aware, credit cards have insanely high interest rates which average about 20%. If you’re only making the minimum payments and continuing to charge more things to your card, then your balance – and debt – could get out of control.
Let’s say you’re carrying a balance of $5,000 on your credit card with an interest rate of 20%. Your minimum monthly payment is just $150 (3% of the balance), but it would take you 50 months (4.2 years) for you to pay the balance and you would have paid an extra $2,359 in interest.
Only charge what you can afford to pay off at the end of every month. Paying interest charges is never worth it.
Paying late or not at all
In addition to interest charges, many credit card providers charge a late fee if you miss your payment date. More importantly, paying late or missing them completely can have a dramatic affect on your credit score. One late or missed payment probably won’t be a huge deal since it may have been an honest mistake, but if you make two late or missed payments in a row, then you’ll instant see a huge drop in your credit score – think 50 – 100 points, if not more.
Now, if you choose to completely ignore your bills, then things will escalate quickly. Your credit card provider will try to contact you first to find out why you’re not making your payments. If you decide to dodge them, then they’ll send your debt to collections which will leave a permanent mark on your credit history. If it comes to this, you’ll have a hard time in the future getting any type of loan unless you repay the outstanding debt.
You’re using the same credit card
Most people get their first credit card while in college or university. This card will likely come from the financial institution you currently bank with which isn’t a bad thing, but there are so many other options out there. You might be wondering why you need a new credit card? Well, so you can maximize your earning potential.
The best travel rewards credit cards in Canada offer huge sign up bonuses and points earning potential which can easily be redeemed for travel. If you prefer to keep things simple, you can take a look at the best cash back credit cards which will earn you a set % in cash back on all your purchases.
If you’re responsible with your spending, then you should apply for a credit card that gives you the most rewards based on your spending patterns.
Tangerine Money-Back Credit Card
Earn 2% Money-Back Rewards on purchases in two 2% Money-Back Categories of your choice, and 0.50% Money-Back Rewards on all other purchases.
- No annual fee
- Earn 2% cash back on purchases in up to three categories of your choice, and 0.5% cash back on everything else
- No limit on how much cash back you can earn
Closing your oldest card
Okay, so you’ve decided to apply for a new credit card to take advantage of the benefits, does that mean you should close the account on your previous card? No, since keeping that account open can actually increase your credit score.
Presumably, your previous credit card is your oldest one. By keeping it open, it shows you have a longer history of making payments on time which is one of the factors in determining your credit score. Sure, you’ll have access to more credit, but this can help you too since it’ll lower your credit utilization rate which is another factor in building your credit score.
For example, let’s say you constantly carry a balance of $2,000 which you pay off at the end of every month. If your old credit card had a limit of $5,000, that means you had a credit utilization rate of 40%. Now, let’s include the new card you just got approved for which also has a $5,000 limit. Well, now you have access to a total of $10,000 in credit. That $2,000 you normally charge now gives you a utilization rate of just 20%. This doesn’t mean you should apply for more credit cards to lower your utilization rate, but what it does mean is that you shouldn’t cancel old cards right away.
Not taking advantage of your included benefits
Depending on what credit card you have, you may have some pretty awesome included benefits. Generally speaking, most credit cards come with extended warranty, price assurance, and zero liability insurance as long as you charge the full purchase to your credit card. These benefits may not seem like much, but it definitely gives consumers peace of mind.
As you can imagine, higher end credit cards come with better benefits. The best travel credit cards come with a comprehensive travel insurance package which usually includes travel medical, trip cancellation / interruption, and lost / delayed baggage insurance. In addition, you could very well have included car insurance, lounge access, concierge service, free checked bags, roadside assistance, and much more.
All of these benefits have a real cost value associated with them which easily offsets any annual fee that you may be paying. Be sure to read the cardholder agreement in detail, so you know exactly what you’re entitled to.
American Express Cobalt® Card
Apply now and you could earn up to 30,000 bonus points with the American Express Cobalt™ Card
- Annual fee: $120 (charged at $10 monthly), but is increasing to $155.88 (charged at $12.99 monthly)
- Welcome Bonus of 20,000 Membership Rewards points when you spend a total of $3,000 in purchases on your Card in your first 3 months of Cardmembership
- Earn 5 points per dollar on restaurants, coffee shops, bars, grocery stores, and food delivery
- Earn 2 points per dollar on gas, taxis, public transportation and travel (air, water, rail, or road transport, plus hotels)
- Earn 3x the points on eligible streaming subscriptions in Canada
- Earn 1 point per dollar on all other purchases
- Comprehensive travel medical, flight delay, baggage loss, and car rental insurance
- Transfer points 1:1 to several frequent flyer and other loyalty programs
The final thought
Don’t feel bad if you’ve made some of these mistakes, no one is expecting you to be perfect. That being said, the quicker you take care of these concerns, the better off you’ll be financially.
- Pay off debt or invest? 8 factors you should consider
- Does Cancelling Credit Cards Hurt Your Credit Score?
- The Best Credit Cards in Canada
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