Your brand new credit card arrives in the mail all shiny, just waiting for you to take it shopping. Before you break it in, though, watch out for these five mistakes new cardholders often make:
Loading up on extras: Before you use your card for the first time, you’ll be required to call a toll-free number to activate it. When you do, you’re likely to be pitched several different products before you complete the activation. You may be offered a subscription to a credit monitoring service, for example, and/or some kind of credit protection program. While there are times when it makes sense to subscribe to a credit monitoring service (here are three), you shouldn’t feel pressured into signing up for one of these services at the moment you activate your card. There’s always plenty of time to shop around and find the right credit monitoring service if you decide you need it.
Credit protection programs, on the other hand, are frequently a lousy deal for consumers. These programs offer to cover your minimum payment if you are unemployed, become disabled, etc. However, a GAO report found that consumers typically pay far more into these programs than they receive in benefits.
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Maxxing out the card: If your card issuer has given you a generous credit line, promised you fabulous rewards for using your card, or granted you a great interest rate, you may be tempted to use your card to pay for everything, or to transfer a balance from another higher rate card. But be careful: running up a significant balance on the new card can hurt your credit scores.
Simply the fact that you have opened a new account can affect your credit scores. If you manage the account well, you shouldn’t experience too much damage. Your scores may even improve.
But if you use a significant portion of the available credit on the new card, you may find your scores going down. So try to keep the balance on your new account at 10% or less of the available credit. You can always make extra payments before your due date to keep your balances low, advises credit scoring expert Barry Paperno, community director for Credit.com.
Not knowing what you have: Do you know what the interest rate is for purchases if you carry a balance on your credit cards? Do you know what default interest rate they can charge you if you fall behind? What about the foreign transaction fee if you make a purchase out of the country, or buy something online from a company based outside the U.S.?
Before you use any credit card for the first time, it’s a good idea to read the cardholder agreement to make sure you understand what you’ve just signed up for. It’s not exactly a fun task, but in most cases these agreements are more streamlined than they used to be, so hopefully it won’t be too tedious.
In particular, you want to make sure you know what the APR is if you carry a balance, how long the grace period lasts, whether there is an annual fee and for how much, and what other fees may be charged, such as foreign transaction fees or late fees.
Missing out on rewards: If you chose your card to earn rewards, then it makes sense that you want to get as many rewards as possible. But it’s not always as easy as simply using your card whenever you buy something. That’s because some reward card programs offer bonus points or miles for certain purchases. For example you may be able to earn bonus miles by:
- Shopping in your card issuer’s shopping portal, or “online mall.”
- Using your card to pay for meals at participating restaurants.
- Shopping at certain types of stores, such as grocery stores or office supply stores.
- Buying items in rotating bonus rewards categories.
However, to take advantage of those extra rewards you may have to register your card. For example, you may need to sign up for your card’s dining rewards program, or you may need to register your card each time a new bonus reward category is announced.
This means it’s worth taking a few minutes to review the information your card issuer provides about rewards programs so you can make sure you’re getting the maximum amount of rewards for the purchases you make.
Adding a cosigner: Although this mistake is listed last in this article, it’s by no means an afterthought. Of all the mistakes cardholders make, adding a cosigner — including, in some cases, a spouse — is near the top of the list. When you add a cosigner to an account, you agree to pay for all the charges that person makes for as long as that account is open. You also agree to pay any balance until the account is paid off and closed. If the account goes into default, you may be sent to collections and sued.
If that all sounds dire, it’s meant to be scary. Adding someone as a cosigner on a credit card is risky and is not something you should do without really thinking it through. A somewhat safer option may be to add a cardholder as an authorized user to your account. You are still responsible for any charges they make on the account, so watch it carefully. However it’s easier to remove an authorized user from your account than it is to close a joint account.
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Image: kevin botto, via Flickr