7 common mistakes to avoid when using a credit card

Credit cards are an incredibly useful and convenient financial tool. When used responsibly, they can help you manage your finances, cover large or unexpected expenses, build a good credit history, and often reward you with perks like cashback.

However, if not used correctly, credit cards can lead to common mistakes that could cost you a lot of money and hurt your credit history. 

Don’t know what a credit history is?

A credit history is a record used to evaluate a person's creditworthiness when applying for loans or credit facilities based on information from previous credit reports, such as repayment history and other data.

Now, let's take a look at 7 common mistakes you should avoid when using your credit card:

1. Failure to make payments on time

Let's begin with the most serious mistake — being late with payments. This is one of the biggest mistakes you can make when using your credit card, and it will remain on your credit report for a very long time.

Make it a priority to meet payment deadlines. Even a single late payment can hurt your credit history, impacting your ability to secure loans or credit cards in the future. Additionally, you'll incur late fees and pay interest for a longer period.

2. Only paying the minimum amount

When you only pay the minimum required by your credit card issuer, you end up paying much more than the amount you initially borrowed. For example, if you use your credit card to pay for a 100 JOD dinner, you could end up paying more than double that amount if you spread the payment over months or years, and this is due to interest. So, if you can't pay off the balance in full every month, pay as much as you can above the minimum.

3. Ignoring credit card statements

It's important to verify the accuracy of transactions on your credit card statement to take timely action against fraud or report any errors. You should review your credit card statement at least once a month to spot any unfamiliar transactions because delaying the detection of fraudulent activity can lead to accumulating losses and being responsible for expenses you didn't authorise.

4. Reaching your credit card limit

Using most or all of your available credit limit is not a good idea. This results in a very high utilisation rate, which can create distrust between you and your bank. Your credit utilisation rate is affected by the amount of balance you use, and it's better to keep it low.

It's generally recommended not to spend even half of your credit card limit. For example, if your credit card has a limit of 2,000 JOD and you've used 1,500 JOD, your utilisation rate is 75%, which is quite high. Aim to use only about 30% of your credit limit to maintain a good relationship with your bank and not hurt your record.

5. Withdrawing cash

One of the biggest mistakes you can make with a credit card is withdrawing cash from an ATM using it. Cash withdrawals usually come with a higher interest rate compared to purchases, and these interest charges can quickly add up to significant amounts. So, it's best to avoid using your credit card for cash withdrawals from ATMs, except in emergencies.

6. Overspending to earn rewards

Many credit cards offer perks like cashback as rewards. While it may be tempting, this can lead you to overspend just to earn more rewards.

Sure, it's nice to earn rewards on day-to-day purchases you make. But going overboard with spending on your credit card to maximise rewards isn't wise and could result in debt accumulation, impacting your ability to save.

7. Cancelling credit cards

When you finally pay off your credit card balance in full, you should celebrate this achievement! But one thing you shouldn't do is cancel your credit card. Here's why: Simply put, doing that won't erase your credit history, and depending on how you cancel your card, it might actually lower your score, making it more challenging to secure credit facilities or loans in the future.

Let's dive deeper into this. The average length of your credit history is a key factor in determining your credit history. By cancelling your credit card, you affect your credit history’s length.

For example, if you have a card that's been active for 5 years and another one for 2 years, the average length of your credit history is 3.5 years. If you cancel the 5-year-old card, your credit history length drops to 2 years. That's why cancelling your credit cards, especially the older ones, is not recommended unless they come with large annual fees.

Avoiding these common mistakes will help you get the most out of your credit card and reduce the risk of hurting your credit history and accumulating fees and interest.