According to a recent study by Compare the Market, a staggering eight out of ten credit card users admit to making significant financial mistakes with their cards. The research highlights several key errors that can lead to hefty charges and negatively impact users’ financial health.
Top Credit Card Mistakes
The most frequent missteps made by credit card users include withdrawing cash using a credit card, only making the minimum repayments, and maxing out or nearly reaching their credit limit. These mistakes are particularly costly, with 37% of users withdrawing cash, 35% only meeting minimum repayments, and 34% flirting with their credit limits.
The Cost of Common Errors
Not paying off balances in full each month tops the list of expensive errors, with almost one-third (32%) of users falling into this trap and consequently racking up an average of £194 in interest payments. With outstanding balances growing by 9.4% over the past year—as reported by UK Finance—and more than half of these balances accruing interest, the implications of such habits are significant.
Overlooking Credit Health
Other notable mistakes include neglecting to monitor credit scores, affecting 20% of users, and applying for multiple credit cards simultaneously, which 11% have done. This latter practice can reduce a borrower’s creditworthiness in the eyes of lenders due to perceived increased risk. Additionally, nearly half of all borrowers (49%) failed to compare card offers online, potentially missing out on better rates or rewards suitable for their spending patterns.
Impact on Credit Scores
The decision to cancel a credit card, made by one in five users last year, can also detrimentally affect credit scores. The length of time a credit card is held is a factor in determining credit scores, so closing an old card, especially the oldest one, can lead to a lower score. Despite this, closing a card might sometimes be advisable, for example, when an annual fee is not justified by the benefits it provides.
Debt and Repayment Challenges
The study further revealed that 27% of credit card holders have been late with repayments, and 45% carry outstanding credit card debt. Alarmingly, 70% of borrowers are unaware of the interest rate (APR) on their cards, and nearly a quarter (24%) are using more than half of their available credit limit. High utilization rates can significantly reduce a credit score, further complicating financial situations.
Advice from Experts
Andy Hancock, Money Expert at Compare the Market, advises, “It’s crucial not to get caught out by common mistakes when using a credit card, which could cost you more in fees or interest repayments and have a negative impact on your credit score.” He suggests paying off balances in full each month to avoid interest charges and recommends setting up a direct debit to ensure timely payments. For those struggling to keep up, switching to a card offering an interest-free period or better rewards might be beneficial.
Hancock also emphasizes the importance of shopping around: “It’s worthwhile shopping around online and comparing cards to find one that best suits your needs and circumstances.”
Conclusion
This revealing study from Compare the Market underscores the widespread nature of credit card mismanagement and its potential to inflict serious financial damage. By understanding and addressing these common errors, credit card users can improve their financial health and avoid unnecessary debt and stress.
