The 4 most common credit card mistakes

The ability to buy things on credit has been around since the late 1800s. So you'd think by now we would be experts. But, according to Canadian personal finance blogger, author and former financial advisor A. Dawn, Canadians still encounter plenty of pitfalls when paying with plastic.

The worst part: Even the most innocent misstep can have a negative impact on your finances.

 "For example, missing out on one payment could drop your credit card score from 60 to 100 points," Dawn says.

Here are the four most common credit card mistakes, according to A. Dawn -- and how to avoid

1. Late payments
Dawn says failing to pay on time is one of the most common credit card mistakes Canadians make. The repercussions can be crippling: late payment charges, interest rate hikes, a damaged credit score. Fortunately, Dawn says, there are plenty of tools available to ensure Canadians meet their deadlines.

"Personal finance software such as Quicken or Mint has a credit card or bill payment reminder feature that can be used to pay bills on time," Dawn says. "Also, a simple online calendar such as Google Calendar or 'to-do' applications can be used to pay credit card bills on time."

2. Paying only the minimum
Paying the minimum amount required by your credit card company might reduce your monthly bill. But it will stretch out the length of time necessary to pay off the debt -- and how much you end up paying in interest. Fortunately, you have the option of taking control and fighting your debt on your own terms.

"Paying a little bit more every month consistently can help a lot in the long run," Dawn says.

Take, for example, a $10,000 balance on a card with a 20 per cent interest rate. Paying

$300 monthly instead of $250 can shave off 17 months and $1,900 in interest, according to Dawn.

3. Cash advances
Withdrawing cash using a credit card is tempting, especially in the throes of a cash crunch. But high cash advance fees and a raised interest rate makes cash advances one of the worst ways to borrow money, Dawn says. Credit card companies, according to Dawn, charge hefty interest rates (usually 20 per cent in Canada) and a cash advance fee (1 to 4 per cent).

"Taking cash advances should be avoided at any cost, as it will sink you more into debt," Dawn says.

As an alternative, Dawn recommends applying for a line of credit account, which will generally charge half the interest of a cash advance and will usually have no transaction fee.

4. Getting trapped by annual fees
Most credit card companies offer cards with perks such as reward points or cash back in exchange for annual fees. But if you read the fine print, you'll often discover that you have to spend an awful lot on your credit card to make these additional fees worthwhile.

According to Dawn, the only time a rewards card is worth the trouble is "when the rewards exceed the annual fee."

See related: A look back -- and forward -- at Canadians' money habits; Expert Q&A: the ABCs of financial literacy

Published February 8, 2012

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