Credit cards can be amazing financial instruments that combine incredible purchasing power with unmatched security and convenience in a few grams of plastic. So it should come as no surprise that any tool this powerful can be easily misused.
Here are five things you should never do with a credit card.
1. Withdraw Cash
When you use your credit card at an ATM, you aren't actually withdrawing cash, you are receiving a cash advance. And since credit card issuers consider this to be a high risk loan, they usually charge cash advance fees that can be $10 or 5 percent of the amount received, whichever is greater. In addition, many credit cards impose a higher interest rate on cash advances than they do on purchases, frequently more than 25% APR. But unlike purchases, you cannot waive the interest on a cash advance by paying your statement balance in full, so interest charges will always apply. To avoid this costly mistake, use your debit card to access cash instead.
2. Earn Rewards While Carrying a Balance
Earning rewards in the form of points, miles and cash back can be extremely valuable, but not when you are also carrying a balance on your credit cards. The problem is that rewards credit cards will invariably have a higher interest rate than similar cards that don't offer rewards. About half of all American credit card users tend to carry a balance on their credit cards, and if you are one of them, you will be spending more on interest charges than your rewards are worth. Instead, try to find a card with the lowest possible interest rate, and forgo earning rewards until your balances are paid off.
3. Finance a Large Purchase
While credit cards can be an amazing method of payment, they are actually a very poor way to finance a large purchase. Unfortunately, some will use their credit card to buy a car, pay for college tuition and even a pay off a large tax bill. Rather than reach for your plastic, with its double digit interest rates, try to find other methods of financing. For example, low cost student loans may be available for college tuition and auto loans tend to have lower interest rates than your credit card. And, if you need to finance a tax payment, the IRS has extended payment options that allow you to avoid both your credit card's high interest rate as well as the expensive "convenience fees" charged by the companies that accept tax payments.
4. Give Out Your Credit Card Number
It can be tempting to give out your credit card number, or the card itself, when you need a friend or family member to make a purchase on your behalf. But when you do so, it not only violates your credit card agreement, it can compromise the security of your account. Thankfully, most credit card issuers allow you to add authorized cardholders at no additional charge, just for this purpose. And if you don't want to permanently add someone to your account, you can always purchase a generic gift card that is part of a major payment network, such as Visa, MasterCard or American Express.
5. Close All of Your Accounts
When people get frustrated with their credit cards, some simply cancel all of their cards and go "cold turkey." Other times, people do so under the mistaken belief that it will help their credit score. On the contrary, closing all of your credit card accounts can hurt your credit score by dramatically increasing your debt to credit ratio. In addition, doing so will reduce the average age of your open accounts and curtail your credit history. When you need to take a break from your cards, it's better to lock them in a secure location, but leave the accounts open and in good standing.
As long as you never do anything of these five things with your credit card and pay your balance in full each month, you should be well on your way to maximizing rewards, improving your credit score and taking advantage of all the other perks credit cards have to offer.