2 Dumb Credit Card Mistakes to Avoid

Credit cards can be essential tools for improving your financial health. Cardholders who are swimming in debt canpay it off debt with a balance-transfer credit card, and responsible users can claim valuablecredit card sign-up bonuses. But there are a handful of mistakes cardholders may want to avoid that, if ignored, could mean getting hit with unnecessary fees and falling short of your financial goals.

With that in mind, Motley Fool analysts Michael Douglass and Nathan Hamilton discuss in the video below two credit card mistakes to avoid.

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Michael Douglass:If you have a credit card, you've got to use it right, and there are a lot of dumb mistakes that a lot of us have made over the years. We figured we'd just talk real quick about a couple of obvious, dumb mistakes that you want to avoid. The first one -- missing a bill. You just never, ever, ever want to miss a credit card bill. In part, it hits you on the FICO score, and there's also a lot of interest rate penalties and a lot of extra fees you're going to end up paying.

Nathan Hamilton:If you look at it, it is a no-brainer. It doesn't seem like a no-brainer. It's a no-brainer with credit cards.

Douglass:Pay your stuff on time.

Hamilton:Pay your stuff on time. Why that makes sense is the average cash-back card has an interest rate around 18%-20%, but many times, when you miss a payment, credit cards will bump your interest rate to a penalty APR, which is normally around 25%-30% [and] many times closer to 30%. That's a huge amount of interest to be paying as a penalty.

And the second thing is there's a late payment fee. Those generally run $25-$35 for a late payment. Some card issuers do give you a little bit longer leash. You can call them up and say, "Hey guys, my bad. Missed a payment, won't do it in the future," and they will refund that fee.


Hamilton:But either way, it is something [of a] no-brainer. Just be on the ball. Pay your bills on time, and you'll improve your FICO score tremendously.

Douglass:And fortunately, there are also ways to do it. You can automate your payments so that you don't have to think about it each month, which, of course, can help, too. Let's also talk about using cash advances on your credit card like an ATM.

Hamilton:This one isn't so much of a no-brainer, but it's just as dangerous when it comes down to it. Using your [credit card] at an ATM to take a cash advance, you're going to be hit with two fees. One is a very high interest rate, and the second is an actual transaction fee.

So, in those scenarios, if you don't have money in the bank, and then you're using a credit card as an ATM, there might be better options out there, and one of those may be asking friends or family for money to essentially pay for that, assuming it is a need, not a want. That is something definitely important to keep in mind, and a mistake you'd want to avoid if possible.

Douglass:Absolutely. For example, if you have $10,000 and you're paying it off at a 29.99% APR, which is not crazy in some of these circumstances, over three years, that's going to cost you $5,000.


Douglass:So, that $10,000 you got is now costing you $15,000.

Hamilton:Another weird fact. Do you want to hear one?


Hamilton:There is a credit card provider out there that in the past few years charged an interest rate above 70%.


Hamilton:And if you work out the math, it's essentially stealing money out of your pocket. Most credit card issuers don't charge that high of a rate. Regardless, credit cards are high-interest cost debt, so do whatever possible to keep your finances in check, and it can pay some dividends for you.

Douglass:Totally. And we've got a lot of information about that, as well as how to use credit cards to your best advantage at fool.com/credit-cards. Included there we have our picks for the best credit cards of 2017. Now is a great time to get that information, and we look forward to seeing you there. Again, fool.com/credit-cards. Thanks, Nathan.

Hamilton:You're welcome.

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