Using a credit card is simple in theory: You borrow money, then you pay it back. If you don’t pay all the charges in full when your bill is due, interest starts to accrue. If you miss a payment, you’re hit with extra fees.
But as many Americans know all too painfully well, there’s more to effective credit card usage than just paying on time. In fact, you might inadvertently make your credit card debt more expensive without even realizing it.
Here are some common credit card habits that can have a more damaging effect on your finances than you realize.
1. Making only minimum payments
When you receive your credit card statement, it shows the minimum payment, or the least amount you need to pay for your account to stay current. Usually, it’s a flat percentage of the balance (although your card issuer may add new interest, past-due amounts or fees). Since it’s a much smaller amount than what you owe in total, it’s tempting to pay just that. But if you consistently make only minimum payments, you might be putting yourself in expensive debt — for a long time.
For example, let’s say you owe $2,000 on your credit card that charges an APR of 20 percent, and the minimum payment is 2 percent. If you only pay that, it will take you close to 34 years to pay off the debt, and you’ll pay $7,125 in interest, according to Bankrate’s minimum payment calculator.
As you can see, only paying the minimum is rather costly, to say the least. Of course, if that’s all you can pay, a minimum payment is better than nothing. Otherwise, it’s best to put as much as you can toward your card balance. Ideally, you want to pay it off in full every month to avoid interest altogether. That’s the healthiest credit card habit you can develop.
2. Taking out cash advances
You can take out cash from your credit card. That’s an appealing feature when you’re short on money and need a quick solution. However, you don’t want to start relying on borrowing cash from your credit card issuer. In fact, a cash advance should be your last-resort option.
This is because card issuers have a separate set of fees for this type of transaction. To start, a cash advance has its own interest rate that’s different from the card’s regular APR, and it’s typically higher. It also kicks in immediately as cash advances don’t have a grace period (or a period between the end of a billing cycle and the payment due date during which the issuer may not charge you interest.) Finally, you’ll pay additional fees: a 3 to 5 percent transaction fee and ATM fees if you use an out-of-network ATM.
Let’s say you have a financial emergency and take out a $500 cash advance. You pay a 5 percent cash advance fee ($25), so now you have a $525 balance at 30 percent APR. Credit card interest typically accrues daily, and in just a month, your balance would grow to $539. As you deal with the emergency, you only pay $15 on the card per month. After five months of this, your balance is $533. That’s higher than you started with, and that’s after making $60 in total payments.
To avoid such high-cost credit card transactions, it’s best to find alternative solutions when you’re short on cash — and only use your credit card for regular purchases.
3. Repeatedly transferring balances
A balance transfer can be a smart debt consolidation strategy when you’re dealing with card debt. A 0 percent APR period on balance transfers allows you to pay down the debt you move from one card to another without interest charges.
However, this method is no cheap trick. It’s an approach that requires discipline and a solid debt payoff plan. And if you find yourself in a cycle of balance transfers trying to escape paying interest, you might accidentally be putting yourself in a debt trap.
Once you transfer a balance, the key is to stop making new charges on your credit cards until you’re out of debt. That includes both the card you moved the debt from and the balance transfer card.
Otherwise, adding to your existing debt defeats the purpose of this strategy. Instead of reducing debt, you end up with two balances, one of which once again accrues interest charges. Another balance transfer won’t fix the issue. Only commitment to full debt payoff will.
4. Chasing rewards
A rewards credit card can be an excellent tool. Cash back lets you put a bit of money back in your pocket every time you make a purchase. Points and miles help you save on travel. But getting carried away with earning rewards can quickly backfire if:
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You’re spending more in certain categories just to earn more rewards. For example, if your card offers bonus points for dining, so you go out to eat more than usual, you might be overspending only to get those extra points.
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You’re pursuing rewards while in card debt. This is a common credit card habit. More than 7 in 10 credit cardholders (72 percent) who carry a balance from month to month are chasing rewards, according to Bankrate’s Credit Card Rewards Survey. Considering the average credit card interest is around 20 percent, it doesn’t make sense to focus on rewards that rarely exceed 5 percent on certain purchases.
If card rewards are your end goal, make sure you’re paying off your card balance in full each month. This way, interest charges won’t negate your rewards earnings.
Further, be careful not to overspend for the sake of extra cash back or points. Get a credit card that rewards your natural spending and avoid changing your habits to get the most out of the card. Remember, you don’t really save anything when you spend more.
The bottom line
Responsible credit card usage is relatively simple — but there are quite a few caveats. From making only minimum payments to taking out cash advances, you might have habits that make your card debt more expensive. Even seemingly smart strategies, like prioritizing card rewards or using balance transfers, can backfire without the correct strategy.
Always pay attention to the terms on your credit card and do the math. Don’t let your credit card turn into a sneaky financial burden instead of the helpful tool it should be.
