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How To Avoid These 8 Credit Card Sins

Last updated

Pauline Hatch      

Ever been late making a repayment on your credit card? Or used your card on an impulse buy that you know you can’t afford? From only paying the minimum at the end of the month to maxing out each card to its limit, these are just some of the ways cardholders commonly mistreat their credit cards.

But how common is it? According to new research recently released by comparison site Finder, a little more than half of credit card holders have been guilty of committing at least one credit card sin in the past 12 months.

Carrying out a survey of 1,004 Aussie cardholders in January, Finder’s research revealed that 20% of participants had made a late payment on their credit card in the past year, while 17% admitted to not checking their statement. In terms of overspending, 18% said they had used their card to make an impulse purchase, while 10% confessed to maxing out their cards.

Perhaps unsurprisingly then, 10% also claimed to have only paid the minimum repayment when their bill was due. Another costly sin was revealed when 8% said they regularly used their card to withdraw cash advances. Rounding out the list, 7% said they paid fees to keep more than one card in their wallet, while 5% owned up to applying for new cards they just didn’t need.

The Cost of Credit Card Misuse

So what exactly makes these examples of credit card misuse so sinful? Being irresponsible with your credit card can be costly in so many ways. When you overspend on your cards, it could end up costing you in interest. Or, it could result in you having to pay more towards your cards, so you have less to spend elsewhere.

Forgetting to make your repayments could also cost you in fees, as could keeping too many cards in your wallet. As for using a credit card to withdraw cash, that’s a double whammy. You not only pay – typically much higher – interest on those transactions, you also pay fees.

But, it’s not just the financial cost of these mistakes that can take its toll. Making late repayments on your credit card could knock down your credit score too. And if you miss your repayment completely, that could be recorded on your credit report as a default, essentially pushing down your credit so that it’s harder to get approved for credit next time you apply.

And that’s saying nothing of the stress that goes hand-in-hand with holding onto credit card debt. When you overspend and max out your cards, when you continually roll over your balance so you are in a perpetual state of debt, that can affect your state of mind, resulting in anxiety over how you’re going to pay your bills while covering the mounting interest costs.

Making Change

Personal finance specialist at Finder, Taylor Blackburn, says misuse of credit cards is all too common. But, that doesn’t mean you can’t turn things around to become a more responsible credit card holder. “Better card management can literally save you thousands of dollars in interest and charges,” he said.

Advising some basic measures cardholders can take to reduce their potential for misusing their cards, Blackburn suggested, “Build an emergency fund to avoid maxing out a credit card if you are faced with an unexpected expense”. And another good one: “Missing a payment attracts a penalty, so set up monthly reminders on your phone to make sure you pay on time.”

Moving on from that advice, we’re going to take a deep dive into the eight sins Finder’s survey revealed as most common among credit card holders. For each ‘sin’, we will look at what it is exactly, why it’s bad, and what you can do to avoid it.

1. Making a Late Payment

During the survey, one in five participants admitted to making a late payment on their credit card. The research also showed men are more likely to commit this sin than women – 24% of men compared to 15% of women.

What is it?

Each month, your credit card provider sends you a credit card statement. You may receive this in the post, or you may get an email reminder to check online banking or your app for your e-statement. This statement shows your open and closing balance, while also outlining every transaction you have made on your card in the past billing period.

In terms of payment, the statement will provide you with a due date and a minimum payment amount. You must pay at least the minimum amount by the due date to keep your account current, and in good standing. Your card provider will likely offer a number of ways to pay, such as direct debit, BPAY, Australia Post billpay, or pay by post.

And if you miss your statement’s due date? This is what card providers call a late payment.

Why is it bad?

If you fail to make at least the minimum repayment by the due date, your card provider will likely apply a late payment fee to your account. Depending on your card, this could range from around $9 to $35. If you’re already struggling with meeting your repayments, this fee will add to your burden, making it even harder to pay down your balance.

But that’s not all. If you’re more than 14 days late making your repayment, your card provider is bound by law to report the issue to Australia’s credit reporting agencies. The misdemeanour will then be recorded on your credit report as a late payment, and your credit score will take a hit.

From there, things tend to get worse for your credit. If you owe $150 or more and your payment is more than 60 days overdue, your card provider can report the issue as a default. This is a much more serious offence in the eyes of potential credit providers and may prevent you from getting approved for more credit later down the line.

Failing to make your repayment could then lead your card provider to pass your debt onto debt collectors. While there are standards in place that regulate how debt collectors can interact with you, you will likely find sorting out the situation with them is more difficult than it would be dealing with your card provider.

And your credit card? That will suffer too. When you fail to make a repayment, your balance starts attracting interest at the card’s standard rate. You will also no longer receive interest-free days on any new purchases. Got a rewards card? You may find your rewards balance frozen or even cancelled if your repayment remains unpaid.

What can you do to avoid it?

If you want to avoid this, start by getting to know when your credit card repayment is due. Your card provider may offer alerts, or you could set a reminder on your phone. Alternatively, you could set up a direct debit or auto payment to cover the cost of your repayment – or a set amount – so you don’t have to think about it.

While it’s recommended you pay the entire closing balance on your card whenever possible, we know that’s not always possible. But what if you can’t even cover the minimum payment? If this happens, contact your card provider before the due date. You may be able to sort something out with your provider, potentially avoiding late fees and a hit to your credit score.

And if you’ve already missed your repayment due date? Again, it’s a good idea to contact your provider to keep them in the loop. If they’re feeling generous, they may waive the late payment fee. If you can pay the minimum – or more is better – make arrangements to do so. If you can’t, you may be able to set up some kind of payment arrangement with your provider.

 

2. Impulse Buying

Buying on impulse was another common problem among survey participants, with 18% confessing to making an impulse purchase on their card.

What is it?

You see something you want and you buy it without thinking of the consequences. That is impulse buying. Whether it’s a new pair of jeans or the latest smartphone, when you make an impulse purchase, you simply buy it and push aside any thoughts of whether you can afford it, whether you actually need it, or in fact, how you will cover the cost of paying for it.

Why is it bad?

When you shop online, sitting in front of the TV of an evening or passing time on the morning commute, it’s all too easy to buy on impulse. Perhaps there’s only one left, or maybe it’s on sale. You tell yourself you have to have it, you tell yourself you need it, you tell yourself you will be better off having this thing in your life.

So, you tap to buy. Then, it’s a just few taps to pay, and you get the email saying the item will be on its way to you shortly.

When the guilt sets in will usually depend on whether you do, in fact, need the item – and whether you can indeed afford it. Those guilts may sneak up on you when you receive the confirmation email, when the item arrives on the doorstep, or as you steadfastly refuse to check your credit card balance, knowing just how bad it will be.

Online shopping makes impulse buying easier than ever – although wandering through the retail paradise that is your local shopping centre can undoubtedly result in impulse purchases as well. However, having a credit card makes it all so much harder to resist.

When you pay with card, there’s a disconnect that makes it feel like you’re not spending real money. It’s also easier to put off the thought of payment, knowing that it’s not something you’ll have to worry about for another few weeks or so. So, as you shop, you tap and you go, getting what you want now and dealing with the consequences later.

How much of a problem is it? That depends on you. How much do you owe on your card – and can you confidently pay it all off at the end of the month? How much are you spending on your impulse buys – and how often do you indulge?

While a small purchase bought on impulse now and then may not break the bank, larger purchases – or making a habit of impulse buying – could cause financial strain over time. It could create debt you can’t pay off, which, on a high interest credit card is not a great idea.

What can you do to avoid it?

There are a number of ways you can avoid impulse buying. Which one you go for will likely depend on how much of a problem you think you have, and your level of willpower.

If you think you can make your willpower work for you, set yourself a two-day cooling off period on all substantial purchases. Doing this, you make a promise to yourself that if you see something you like, you will wait two days before you buy it, giving you time to weigh up whether the purchase is worthwhile and if you can afford it.

If your willpower is not that strong, you could try leaving your cards at home when you shop, or taking your credit cards off your mobile wallet so you can’t access them with your device. There is also the option of giving your card to your partner, so you have to validate your purchase to them (and to yourself) before buying.

Either way, making a conscious effort to be more mindful when you shop could make a big difference. Owning up to your purchases may also help, as you force yourself to track each transaction on your statement to make yourself more accountable.

 

3. Not Checking Your Statement

Talking of checking your statement, it seems 17% of survey participants failed to do this, either on occasion, or more regularly within the past 12 months.

What is it?

As we mentioned before, your credit card statement details important info regarding your card, including your balance, and each transaction made during the billing period. While it’s recommended you read through your statement carefully each month, some cardholders simply don’t – either because they don’t see the need, or they don’t want to see the damage.

Why is it bad?

There are a few reasons why neglecting your credit card statement is not a great idea.

First up, if you don’t read it, you won’t know how much you’ve spent and where. This could result in you overspending because you think you spend less than you actually do. Similarly, if you’re not checking your balance because it’s painful to see how much you’ve spent, you’re allowing yourself to stick your head in the sand, which will likely result in more needless spending next month.

But that’s not all. Checking your statement is vital to keeping credit card fraud at bay. How so? When you check your transactions, you can see which ones you legitimately made using your card – and in the case of fraud, which ones you didn’t. You can then raise the issue with your card provider, who will follow it up.

If it’s fraud, you will be issued with a new card, and thanks to the Visa and Mastercard Zero Liability policy, you will not be held liable, which means you will likely have the fraudulent transactions refunded.

On the other hand, if you don’t check your statement, you could miss those transactions – which means you pay for them. And, knowing they are onto a good thing, the fraudsters who targeted you will probably continue to do so.

What can you do to avoid it?

Take the time to check your statement each month when you receive it. If you’re unsure of any transaction listed, you can Google the retailer to find out more info. Your card provider may also offer a search function within its app or online banking. If it still doesn’t look right, contact your provider and raise the issue with them.

Remember, credit card fraud isn’t always carried out on a grand scale. Fraudsters may steal a few dollars here and a few dollars there, knowing it will remain under the radar of most cardholders. However, these amounts will add up over time, and may get bigger as the individual or organisation behind it gets more confident.

 

4. Maxing Out Your Credit Card

Ever maxed out your credit cards? One in ten participants of Finder’s survey admitted to doing it too.

What is it?

When you apply for a credit card, you are assessed for your creditworthiness. In doing this, the card provider takes into account a number of factors – such as your income, the stability of your employment, your other debts, and your creditworthiness – to determine whether or not to approve the application.

As long as you are deemed worthy of approval, the card provider will assign you a credit limit that you can spend up to on your card. When you max out your card, it basically means you have spent up to your limit and can’t spend any more.

Why is it bad?

The main reason maxing out your credit card is bad is the fact that it leaves you with a large lump sum you have to pay off on your statement due date. If you can comfortably afford to pay it all off, it’s not much of an issue – but if you can’t, things start to get a bit hairy.

First up, fees. You will likely pay an over-limit fee if you go over your card limit. Next, is interest. If you have spent up to your credit limit and can’t clear it by the statement due date, interest will start accruing on the remaining balance. Then, if you can’t pay down your balance the following month, you may go over your credit limit again when the accrued interest is applied.

As fees and interest continue to stack up, that balance becomes more and more difficult to pay down. With this level of revolving debt, it can be hard to imagine getting out of debt, which could lead you to stop trying.

What can you do to avoid it?

If you have a credit card, it can be helpful to create a budget so you know exactly how much you can spend on the card. You may want to set a spending limit on the card to limit the temptation to spend (this can usually be done in-app). It can also help to pay off your purchases regularly through the month, preventing your balance from growing to an insurmountable sum to be paid off when your statement arrives.

Already reached your limit? If you’ve spent beyond your means, it’s now time to work on paying it down. Start by creating a more restrictive budget, focusing on pulling back on spending and freeing up more to pay down your card. Avoid any new spending on your cards in the meantime, and set yourself goals to break down your debt into manageable chunks.

Applying for a balance transfer card provides another option, but you will have to be disciplined to make this work for you. No new spending on either the new card or your old cards, and keep to a repayment schedule that allows you to clear your debt within the introductory period. Consider closing your old card accounts if that’s possible.

 

5. Only Paying the Minimum

If there was a golden rule to live by in the land of credit cards, it would be to always pay more than the minimum. Unfortunately, that’s one rule 10% of the survey’s participants either didn’t know about, or chose to ignore.

What is it?

On your credit card statement, both your closing balance and your minimum payment will be highlighted.

Your closing balance is the total amount owing at the end of the statement period. Paying that amount in full will clear what you owe, allowing you to avoid interest accruing on it – while also allowing you to take advantage of interest free days on any purchases you make in the coming month.

The minimum payment, on the other hand, is the minimum amount you must pay to avoid a late payment fee, and to keep your account current. When you ‘only pay the minimum’, this essentially means you pay the minimum payment and nothing more.

Why is it bad?

When you only pay the minimum, you increase the amount of interest you pay – and you stay in debt much longer. Let’s look at an example.

Say you owe $10,000 on your credit card, which has a 20% p.a. purchase rate. If you only pay the minimum repayment each month, it would take 61 years and 3 months to clear your debt. During that time, you would repay $42,073 in interest, on top of the $10,000 you borrowed.

If you choose to make larger repayments of $501 each month, you could pay off your debt in two years, at an interest cost of $2,015.

While these sound like pretty wild numbers, it’s also worth pointing out that there would likely be fees added on top. And, of course, if there was any new spending made over that time, there would be even more to pay down.

What can you do to avoid it?

Unless you absolutely cannot afford to pay more than the minimum payment, try to pay more whenever and wherever you can. Again, creating a budget could help you free up more funds to put towards your card balance – and a balance transfer is there as an option as well.

 

6. Taking Out Regular Cash Advances

Using a credit card to make a cash advance comes with all sorts of extra costs. Despite that, 8% of survey participants confessed to using their card to make withdrawals on a regular basis.

What is it?

There are two types of transaction you can make on a credit card – purchases and cash advances – with each one processed differently by your card provider. When you use your card to buy something online or in person, this is usually processed as a purchase. As such, it will attract the card’s purchase rate, unless you clear your balance at the end of the month.

When you use your card to withdraw cash or to cover a cash equivalent, such as foreign currency or a gift card, this will be processed as a cash advance. With this type of transaction, your card provider will likely charge a cash advance fee, and will apply the card’s (usually much higher) cash advance rate, starting from the day the transaction is made.

Why is it bad?

When you use a credit card to withdraw cash on a regular basis, it will cost you in the long run. You will get hit with a cash advance fee every time you do it, which will either be a flat dollar amount, or a percentage of the amount withdrawn. You will also pay through the nose in interest – with rates reaching 24% p.a. and higher on some cards.

What can you do to avoid it?

This one’s simple. Just don’t do it.

 

7. Paying Fees for More than One Card

When you have multiple credit cards, you have multiple annual fees to cover. Within the survey, 7% of participants admitted to paying out annual fees on more one card – but were they getting more back from their cards than they were paying out in fees?

What is it?

Most credit cards in Australia come with an annual fee. These fees are applied each year, and can range from $25 or so on basic cards from member-only providers and credit unions, to hundreds or even thousands of dollars on feature-backed behemoths from the likes of American Express.

Why is it bad?

Got a few credit cards in your wallet? Whether this is ‘bad’ or ‘good’ really depends on what kind of value each card offers you as a cardholder. If you’re a big spender and get way more value in rewards than you pay out in annual fees, your card’s annual fee is probably worth paying. Or, if your card provides a heap of perks – that you actually use – you may get value that way.

On the other hand, if you have a number of credit cards that you’re not getting good value on, then it’s kind of like throwing your annual fee dollars into the wind.

What can you do to avoid it?

Start by taking stock of your credit cards. Look at how much you’re paying out on them in fees and interest, and then compare that to the dollar value of what they offer in return. If your cards are no longer offering value in the way you use them, check out what’s available elsewhere in the market. CreditCard.com.au makes this super easy.

Aside from the various frequent flyer and rewards cards on offer, you may also want to consider cards with no annual fee if you want to keep your outgoings down even more.

 

8. Applying for New Cards You Don’t Need

Last on the list of sins involves applying for new credit cards you don’t need. Within the survey, 5% fessed up to this.

What is it?

This one doesn’t need much of an explanation. You see the card, you apply for the card. You get the card, even though you don’t particularly need the card. This can often be a problem for card hunters always on the lookout for introductory offers.

Why is it bad?

While there’s nothing especially wrong with applying for a new card, it can become a problem if it affects your finances or your credit. In terms of your finances, you may find an increased temptation to spend when you a new card in your wallet. You will also have to pay more in annual fees when you add a new card to your stash.

Then there’s the issue of managing all those cards. Not only do you have to keep on top of your spending, you also have to keep on top of each card’s repayment date to avoid getting charged interest and late fees.

And the impact on your credit? When you apply for a number of credit cards – particularly within a short space of time – it can negatively affect your credit score.

In addition, those applications are recorded on your credit report, which can look suspicious to potential credit providers should you apply again. If that provider decides you are a risk because you are ‘desperate’ for credit, they could reject your application – giving your credit a further knock.

What can you do to avoid it?

Instead of applying for every card you like the look of, spend more time comparing the market. Narrow your choices carefully, and only apply for a card that you know will provide value to you. If you do need to apply for more than one card, try to space out your applications.

 

Photo source: Getty images
Pauline

Pauline Hatch

Pauline is a personal finance expert at CreditCard.com.au, with 8 years in money, budgeting and property reporting under her belt. Pauline is passionate about seeing Aussies win by making their money – and their credit cards – work smarter, harder and bigger.

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