Credit cards have become essential for modern life, especially for anyone who likes to fly on commercial aircraft, rent cars, or stay in hotels. But if you're not on the ball, it's easy for even a simple credit card to turn into a financial sinkhole.
You've already voiced the best possible use for credit cards, to streamline your everyday purchasing so you can pay down a single bill each month without paying interest. Along the way, if you've got a solid rewards credit card, you can earn some extra treats or cash rebates. But watch out for these five pitfalls of modern credit cards.
1. Credit score effects
Even if you're managing one or two credit cards effectively, watch out for ways your cards could impact your credit score. Responding to too many instant approval credit card offers can drop your score. So can closing unused cards or keeping too high a balance compared to your credit limit, both of which raise your credit utilization ratio.
2. Unnecessary add-ons
Some companies love to offer special "protection packages," credit monitoring services, and even magazine subscriptions that can turn a credit card with no annual fee into a routine money-suck. When you hear the phrase, "at no risk to you," assume it's got a price tag.
3. Human error
Most of us worry about identity theft, but it's more likely we'll feel the effects from a misplaced check or a payment coded with the wrong account number. Use a credit card with a solid customer service team that can help resolve human errors.
4. Changes in terms
Even when two great companies come together, customers sometimes get caught in the undertow. A merger might prompt you to close an account because of less attractive terms, so be sure to read the updates from your bank and have an exit strategy.
Recognize that your available line of credit isn't an emergency fund or a source of backup income, and you'll do just fine. If you can't resist the urge to spend up to your limit, try switching to a charge card that forces you to pay your bill in full each month.
Remember, a credit card issuer is in business to make money for its shareholders, not to play lifeguard for you. It's up to every one of us, as consumers, to watch out for ourselves and each other, especially as we get ready to turn the corner from recession into recovery.
Correction, March 19, 2012: The original answer stated, incorrectly, that having too much available credit compared to your income can drop your score. In fact, credit reporting agencies do not collect information on income, and therefore can't factor it into your credit score.