Bad Ways To Use Credit: A List of 21 Credit Card Mistakes

by Silicon Valley Blogger on 2008-02-11 34

While growing up, I didn#8217;t learn much about personal finance nor the concept of credit cards, which were matters I wasn#8217;t exposed to until later in life. I learned a few basics such as bill paying, check writing, and bank accounts from my parents but for the most part, I was left to my own devices throughout college and my early adult life. So it#8217;s a really good thing I didn#8217;t own a credit card until I had successfully established some savings and picked up my very first books on finance: Bogle on Mutual Funds and Your Money Or Your Life, whose pages I devoured quite handily.

But I must admit that when I received my very first credit card, I was slow to use it. I#8217;m one of those people who gets stuck by inertia and takes a while to change my typical behavior. I did not have a credit card during my college days (thank goodness) as it seemed to me that during those days, credit card companies were not frequenting campuses in the manner that they do today. I don#8217;t recall seeing too many offers for credit floating around my university then, and I can#8217;t speculate how I would#8217;ve reacted if I did see any. Ultimately, this led to me getting my cards during a time that I felt financially responsible for myself as I worked on my first job. Such a start may have caused me to be more cautious and responsible about using credit, a fantastic thing!

Maxing out credit card and paying in full

Nowadays though, anyone with a pulse can pick up a credit card very easily and begin getting themselves into quick trouble. It#8217;s way too convenient to start using a card, which can be done with your eyes closed without the benefit of an instruction manual. I thought I#8217;d help out a little by putting together all the pertinent warnings I#8217;ve come across when dealing with the plastic. Protect your credit and avoid debt by knowing what it is you shouldn#8217;t do!

How To Get In Trouble With Credit Cards

#1 Misusing balance transfers.

We put together a list of great balance transfer credit cards. But if you#8217;re going to transfer your balance to a new credit card with a lower rate, you#8217;ll have to check if it#8217;s a promotional rate. It#8217;s probably not wise to do a transfer if you#8217;re unable to wipe out your debt before a promo rate expires and jumps up to a much higher rate. On top of that, you#8217;re charged a transfer fee if you move your balance.

#2 Not shopping for the best rates.

The best way to use a credit card is to always pay your balance in full. If so, then the card#8217;s rate may not be as important to you as other features would be, such as having rewards programs and long grace periods, or having no annual fees. But if you believe you#8217;ll be carrying a balance, then by all means, find those cards with the lowest interest rates (e.g annual percentage rates or APRs). Note that one card can carry a number of APRs, so make sure you review all the card#8217;s terms. Tip: Shop for the best rates if you#8217;re going to carry a balance!

#3 Falling for introductory rates.

Because APRs can change on you, you#8217;ll need to watch out for those introductory rates (also known as teaser rate, special rate, #8220;limited time only#8221; or promotional rates). The rates may sound sweet so that they entice you to sign up and transfer your balances over to a card but you may find that after a given period of time, those rates shoot up. Tip: Transfer your balance over if you#8217;re planning to pay it off before the teaser rate expires and changes to a higher APR.

#4 Ignoring the terms and other fine print.

Some credit cards have you automatically signed up for certain features. If you read the fine print, this may be something you can end up opting out from and avoid getting ensnared into something you#8217;d rather not participate in or pay for. According to a FindLaw.com survey, only 44% of customers read the terms of their credit cards, which means that some of us may not realize that rates can change on us, or that fees can be triggered when we don#8217;t expect it. Tip: Check if you need to opt out of anything.

#5 Taking out cash advances.

It#8217;s just not a good move to have to take out cash advances. There are high service fees and possibly higher rates associated with cash advances so it#8217;s definitely something I don#8217;t ever plan to use. Cash advances are costly, while saving the money for what you need is always the cheapest way to go.

#6 Not reviewing your monthly statements.

We religiously review our monthly statements to make sure there are no erroneous charges on it and to keep our eye out for fraudulent activity.

#7 Not checking your credit reports.

It is highly recommended to review your credit report at least once a year to catch any errors it may have. Mistakes in your report can lead to consequences to your credit score, higher interest rates, issues with employment or housing, or indications of fraud. Report any problems to the credit bureaus, which do receive notices of errors online.

#8 Not working with creditors when there are problems.

You#8217;d be surprised how easy it is to work and negotiate with creditors who are looking to keep your business. If you#8217;ve got any questions about your bill or the terms of your card, don#8217;t hesitate to ask. I#8217;ve had the pleasure of successfully disputing charges on my card as well as getting many fees waived just by having amiable talks with customer service.

#9 Signing up for retail credit cards.

They#8217;re everywhere offering you an instant 10% off your day#8217;s purchase! I#8217;ve got family who simply cannot say #8220;NO#8221; to these offers and they#8217;re now swimming in retail cards. These cards are a lousy deal because they have potentially higher rates and they just add to the clutter in your wallet. Are the one time discounts worth the hassle of dealing with more cards, open credit lines and additional debt?

#10 Paying bills without prioritizing them.

I#8217;ve talked a lot about prioritizing our bills as a way to save on costs and protecting our interests. Pay off those bills that are the most important (those that keep the roof over your head) and most expensive (the highest interest rate debt) first. Not caring about the order of your bills can potentially jeopardize your living situation if you find that you#8217;re having trouble covering the most essential bills by month#8217;s end.

#11 Using credit instead of cash or debit cards.

Again, there#8217;s no issue with using cash vs credit or debit cards if you can afford to pay off all your balances in full. But by using cash or debit cards, you#8217;ll only be limited to spending what you have in your bank account. There#8217;s always that danger of going beyond what you can afford when you#8217;re tapping your credit, making it too easy to get in over your head with debt.

#12 Not paying credit card bills on time.

I can#8217;t tell you how many times I#8217;ve lost out on good money by having to cover late payment fees. I#8217;ve messed up on occasion and forgotten to pay a bill or two on time. That#8217;s actually one thing I#8217;m seeking to improve #8212; to be more organized and systematic about things. Not being organized just means money lost, and I#8217;ve paid dearly for my absent-mindedness. To avoid late or missed payments, sign up for auto payments.

#13 Paying the minimum on credit cards.

You don#8217;t have to play by the credit card company#8217;s rules. They want you to pay only the minimum! But why should you? Pay more than you have to and you#8217;ll beat your debt faster.

#14 Spending on credit for the rewards.

It#8217;s been said that a third of credit card holders use their cards for the rewards (miles, points, perks, gifts, etc) but if you#8217;re feeling too comfortable about spending on credit because you#8217;ve convinced yourself that you#8217;re getting the rewards for free, then this is a big mistake. Rewards are never worth the debt you can potentially bury yourself under.

#15 Being in denial about one#8217;s spending.

It#8217;s easy not to think you are not really spending your own money when you are using credit. A lot of card holders sweep reality under the rug and think that they can spend now and worry about paying about their purchases later. Or that #8220;things will work out#8221; and they#8217;ll find the money to cover their credit card bill somehow. I#8217;m blaming this type of thinking for much of the rampant debt problems we#8217;re seeing everywhere.

#16 Collecting credit cards.

Credit cards can be cute. Or slick. Or really cool these days. They#8217;ve become attractive on many fronts and many people are succumbing to the marketing forces behind these cards. There are a lot of people out there who have turned to credit card collecting as a hobby or even as a money-making venture via credit card arbitrage. Regardless of your reason for having a lot of cards, you could be facing the temptation to use them#8230;a lot. I only keep a limited number of cards because there#8217;s risk in carrying them; the risk of fraud, loss, error or mismanagement of this tool has kept me from owning more than a couple of cards.

#17 Putting daily expenses on credit.

If you#8217;re responsible about paying your cards, I don#8217;t really see an issue with paying all your expenses through credit. The trouble occurs when one is unable to control their spending because all of it just goes on credit. You know, out of sight, out of mind. Because expenses and debt can add up really quickly, it#8217;s best not to pass off everything to the plastic.

#18 Closing credit cards improperly.

Apparently, there#8217;s a system behind closing your credit cards. You should never close the following cards you carry:

  • any card with a balance
  • your only card with available credit
  • your only credit card
  • your oldest credit card account
  • your card with the most favorable terms

In your quest to simplify our finances, you may be tempted to cancel accounts you don#8217;t use or don#8217;t plan on ever using. Bad move? Well this could be a mistake as far as preserving a favorable FICO score. It#8217;s to do with your credit to debt ratio.

#19 Adding additional names to your card.

Unless you completely trust whoever it is who has their name on your card, you shouldn#8217;t be adding anyone to your account. The moment you do, you#8217;ve lost control of how the card may be used, which just means that you may encounter more spending on it than you bargained for.

#20 Using your credit card internationally.

If you#8217;ve ever used your card outside of the country, then you may already know that there are extra charges and fees imposed on international transactions. If you#8217;d rather save on this cost, then go with cash and traveler#8217;s checks instead. Still, what I like about using a credit card abroad is that there may be less risk in doing so, since transactions on a card can still be disputed if there#8217;s any question, while there#8217;s the risk of cash and checks getting stolen when you#8217;re traveling. Personally, I pay extra for the convenience of using credit during trips.

#21 Exceeding your credit limit.

Going over your credit limit can incur you some unwanted, costly over-the-limit charges and fees that can also make a dent on your credit report. So here are a few tips to avoid maxing out:

  • review your statements regularly and pay in cash when you#8217;re close to the limit
  • guideline: stay within 30% to 50% of your credit limit
  • if necessary, request for an increase in your credit line (though it could just be an excuse to spend even more, so be careful!)

We haven#8217;t had much trouble with our credit cards because we do pay our balances in full each month, review our statements for possible billing errors or suspicious activity, and have had good luck with dealing with our credit card companies. They#8217;ve displayed great customer service when we#8217;ve disputed questionable transactions and when we#8217;ve asked to negotiate unexpected and unwanted fees and charges (regardless of who was at fault!); they#8217;ve been proactive with tracking and monitoring for fraud and we#8217;ve received some wonderful rewards in the process. I#8217;m actually a fan of credit cards but I guess you can say that the beauty of credit cards is in the eye of the beholder#8230; or rather, in the way they are used.

Copyright 2008 The Digerati Life. All Rights Reserved.


Beginner#8217;s Guide to Using Credit Cards

Maxing out credit card and paying in full

Having a credit card is usually a good idea.

It can give you a good way to establish and then build up your credit history. Also, there are some credit cards that will let you earn rewards such as travel miles, redemption points, and even cashback, but chasing down these bonuses can lead you down to a credit card debt.

If you have issues paying your bills on time, saying “no” to buying things that you can’t afford, or just have a gut feeling that a credit card may not be great for you, then trust your instincts. Even though a credit card may be of big help when building up your financial health, it can also cause consumer debt when it is used improperly.

If you feel that you are ready to take on the responsibility of having such a financial tool, then keep reading to learn how to select, understand, apply, and manage your very own credit card.

Selecting the type of your credit card

Maxing out credit card and paying in full

Credit cards are not made equal, and we aren’t just talking in terms of rewards and interest rates. Your situation will determine which credit card you could and should apply for.

Lenders do understand that a college student doesn’t have a lot of money. In fact, most college students’ debt to income ratios are usually facing the wrong direction. Although, lenders still make it quite possible for students to get credit cards through their student programs.

College students can get a credit card if they have an established credit union or bank account. These types of cards will often have high-interest rates, so watch your spending.

Maxing out credit card and paying in full

A secured card is an option for those who are looking to build or rebuild their credit history.

Having a secured card will let a potential borrower put down a deposit in exchange for a credit card from a lender. Often, the credit limit for the borrower is the exact amount of the deposit, but that isn’t always the case.

If you are unable to make payments, you lose your deposit. If you prove to be dependable over time, then you will receive your deposit back after closing the secured card and getting an unsecured, regular credit card.

Ensure that you are taking a secured card from an FDIC organization, such as a local credit union or bank. It is vital that you don’t spend a lot on this card because your credit limit will be quite low.

Maxing out credit card and paying in full

If you have been offered a store credit card at least once, then you know the drill. Store cashiers ask if you want to open a store credit card for a percentage off your purchase.

Normally a store card can be a huge trap into consumer debt. Just missing one payment in full can lead to high-interest rates and leave you struggling to pay down your bill.

Although, store cards will often accept a lower credit score than a regular credit card. If you are looking to rebuild your credit, but have a credit score that is in the low 600s, you could apply for a store card and get approved, when you would most likely get rejected for a regular credit card from a different lender.

Maxing out credit card and paying in full

Normally, the bank has hopes that you will have trouble paying off your bill – but if you are diligent, you can use a store card to rebuild your credit score. Store credit cards have very high APRs.

If you have a good to excellent credit score, which is normally 680 or higher, then you will most likely be qualified to get a credit card.

Be sure to do some research to see what type of credit card will work for you. You can use a cashback tool to see what your spending habits are and find out which card will maximize your rewards.

Understanding the details of your card

Maxing out credit card and paying in full

Once you have decided on the type of card that you want to apply for, it will be time to start your research. You will need to understand all the details of your card before you sign your name.

First, evaluate the APR for the card. It is ideal to have a credit card that comes with a low-interest rate like 9.99%. You will want to avoid paying interest, but in the case that you do, you will need to understand what exactly you are being charged.

Will there be an annual fee on your card? With the exception of secured cards, there is no point to bother spending any money on an annual fee when you start out with a credit card.

What will the credit limit be? You won’t actually find out until after you have applied and have been approved. It is vital that you remember your credit limit to avoid maxing it out.

Apply for your credit card and read all the fine print

Maxing out credit card and paying in full

You can often apply online, but if you want to do it in person, simply go to your local credit union or bank. Be sure to look over the fine print while you are applying.

A credit card is structured to create debt. In order to avoid debt, it is vital that you understand the difference between spending and borrowing. Do you have a strict budget and only spend what you can pay off each month? Check for spending.

If you know that you cannot afford an item and use your credit card, then that is borrowing. Credit cards aren’t the best route to use if you need to borrow money. Although if you are going to use a card for borrowing, then you need to have the lowest interest rate possible. Starting to borrow at a 23% APR will harm your account.

Ignore the minimum due and pay in full

Maxing out credit card and paying in full

Credit card companies will offer you a minimum due in hopes that you will just pay a small amount of your bill so that interest will start accruing. That can be confusing when you see that on your first billing statement. The best thing to do is just act like the minimum due doesn’t even exist. Be sure to pay in full on your bill. Paying the minimum will just mean that you end up paying more to a lender.

Paying your bill on time is the best thing you can do besides paying in full. Being just one day late can crush your credit score. If you know your bill is due Tuesday, but you can’t pay in full until Wednesday, then just pay as much as you can and then pay off the remainder when you can. It may seem that paying it off in full a day later would be better, but that isn’t how the lender sees it. They will see you as irresponsible.

Maxing out credit card and paying in full

The utilization rate is an amount of your overall credit limit that you spend. You should keep this rate below 30% of your available credit. Having a low utilization rate shows responsibility to lenders and helps to improve your credit score.

Be careful where you share your credit card information

Maxing out credit card and paying in full

You will need to protect your credit card. At least at one point in your life you will experience fraud, but it is always best to be proactive and careful where you share your credit card information.

Be sure to use your credit card, because your lender can discontinue inactive cards. If you feel uncomfortable using it, but still need to build your credit up, then purchase a small item a month such as a cup of coffee and then set up automatic payments, so you know that you will never be late on your bill.

We hope that this guide has been helpful to you. Don’t hesitate to ask your questions in the comments and learn more about how to switch credit cards and reduce your spending.

Still looking for more? Feel free to check out our comprehensive personal finance guide to learn more about managing your budget and staying financially healthy.


5 Spending Traps I Now Avoid After Maxing Out My Credit Card At 20

Maxing out credit card and paying in full

Yes, you read the title right. Just in the midst of my college career, my credit score took the biggest plunge, and consequently, so did my self-esteem.

After that catastrophe, it took me almost a full year to even be able to begin paying off my outstanding balance in full each month. There were, of course, a few things that especially led me down my path of unhealthy spending habits. Here are five spending areas I would suggest steering clear of if you want to avoid a financial crisis like mine.

1. Delete the Starbucks and Favor app. It is a trap.

Let#8217;s talk about the Starbucks app. I didn’t realize how much I was spending on Starbucks until I noticed I had to hit the “reload $25” button on my app every few days. If you can get out of your unhealthy caffeine addiction sooner, and realize the beautiful wonders water can do for your face and overall health, you’ll definitely save your money for better (and bigger) investments.

Additionally, apps such as Favor or Postmates that deliver food to you may sound amazing when you’re in the middle of a study session in the library, learning about cost-pull and demand-pull inflation, but trust me when I say you really need to stop being lazy. If you have these apps, you probably know how addicting they can be. So do your wallet a favor, and delete them #8212; you’ll thank me later!

2. The fashion police won’t stop you. It’s okay to be an outfit repeater.

Remember when Kate Sanders told Lizzie McGuire she was an outfit repeater? I blame that integral television moment for my actual fear of being an outfit repeater — specifically when it comes to dresses. In my University, towards the end of every semester, it would be formals season. I would go online looking for affordable dresses at online boutiques such as Lulu’s, Tobi, etc. I didn’t have time to just go to the mall when I had to juggle all my classes and organizations I was involved in. And you know what? Online shopping can be addicting. Those dresses I got were beautiful, but the shipping fees that came with them were not. Spoiler alert: It’s okay to wear the same dress twice. Maybe even swap with your friends. I promise Kate Sanders won’t find you, and if she does, you can always call her an outfit rememberer.

3. Stop buying furniture and decor you don’t need.

I wanted my college apartment to look like those lavish, fun ones on Pinterest. Who doesn’t want their apartment to look cute and inviting? But let’s be real. You’re only in college for a few years, and you’ll most likely move out of your living situation soon after graduation. While you need furniture that is sturdy, you don’t need geometric accent decorations from Urban Outfitters that you definitely could’ve made yourself.

4. Don’t spend money at the same rate your friends do.

Unfortunately, it took me some time to realize that some of my friends actually came from wealthy households. For some reason, just living in the same neighborhood as them made me assume we all came from the same range of social backgrounds. When I started paying more attention to my friends#8217; spending habits, I eventually figured out that that wasn#8217;t the case at all.

It’s definitely okay to opt to stay home instead of hanging out with all your friends when they can spend money you don’t have. I noticed some of my friends were able to live off of eating at fast food chains and restaurants and never cook for themselves. I don’t know how I was able to eat Chick-fil-A every day for months. It’s upsetting not getting the lucky receipt with the “one free Chick-fil-A sandwich after doing an online survey,” but it was even more upsetting realizing I would have saved hundreds if I had just learned to cook my own meals sooner.

5. Not every experience is worth dropping money for.

I don’t know about yours, but how are all my friends constantly going out of the country and taking the most beautiful, Instagram-worthy pictures? Some experiences are definitely life-changing. I never thought I would go to music festivals five years ago, but I went to some, and they were amazing. It’s good to be open-minded, and experience new places with your friends.

However, be mindful of how much you’re spending. The costs add up, between hotels, food, and tickets. It’s okay to miss out on some experiences, because you can look at missing out as saving for even better ones in the future.

Bea is a senior Economics major at the University of Texas at Austin. She is trying to use her knowledge to help others achieve their financial goals.

Free tip. Stop writing such idiotic and facile posts. You are spending like a well-paid working professional, not a student. Buy your furniture at Salvation Army. Eat Ramen. Throw out your credit cards #8211; clearly you#8217;re not bright enough to manage money (ironic you#8217;re an Economics major #8211; think you should switch to Home Econ#8230;)

I don#8217;t think being an Economics major teaches you how to spend your money. You#8217;re spiteful and your negative comment adds to nothing. I think the writer acknowledged her bad spending habits after a while. I think that#8217;s what happens to most of us when we neglect our bad habits.

The writer is here to share their experience and help others, and you#8217;re here being spiteful and adding nothing to this conversation. I think many people make mistakes especially when they are young, and we learn from them. That is the whole point of TFD.

Also, I don#8217;t think it#8217;s wise to just #8220;throw out your credit cards#8221; . Clearly you know nothing how to manage cards. Good day to you, #8220;disqust101#8221;.

Free tip: don#8217;t waste your time and our time telling someone not to write things on a website. There#8217;s this little x at the corner of the tab that allows you to leave any article you don#8217;t enjoy reading.

I really like this article! Thank you for giving us your insight. You had humor and I really loved this relevant reading!

I can understand the whole thing about dresses. It#8217;s hard! Especially when you post pictures on Instagram and Facebook. My pledge sisters and I would share dresses to save money. I think it#8217;s ridiculous that dresses are expensive for just a one time wear. I regret lavishly spending on them when I would only wear them to one event #8211; I totally relate to you there. I LOVED how you related this to Lizzie McGuire, that gave me a good laugh.

Also, I almost maxed out my credit card when I was young too. It#8217;s hard when things just start to add up. I would spend a lot when it came to food because I didn#8217;t know how to manage my time to be able to cook meals. I also didn#8217;t want to just eat fast food because I knew it was unhealthy.

Thank you so much for sharing this article! I really appreciate that The Financial Diet includes a lot of different voices. It#8217;s good to have serious topics, but it#8217;s also even better when we can look back and write about our mistakes in a new light.

I never understood the thing about outfits. When I find something that really fits, feels comfortable and looks good on me, I#8217;ll wear it again and again. Combine it with different things. And never got a single negative comment about #8220;repeating outfits#8221;.


Is it Okay to Max Out a Credit Card?

by Neil Kokemuller

Cutting a maxed-out card may protect against accidental usage.

Maxing out your credit card to buy the latest fashions, coolest shows and hottest technologies may sound fun, but be prepared for very negative financial repercussions. In general, high credit card debt brings about unfavorable limits to your future buying power. There are rare exceptions when heavy card use makes sense.

A primary drawback of maxing out your card is the negative impact high debt utilization has on your credit score. Your debt-to-credit-limit ratios account for 30 percent of your FICO rating, or credit score, according to MyFICO. This is the ratio showing how much of the credit available on your credit cards you have used. If you literally max out a card, you have a 100 percent ratio, which significantly hurts your score. Ratios even close to 100 percent are bad for your credit. Credit scores are one of the most important tools used by lenders to decide whether to issue you new credit and at what rates, so it's worth trying to maintain a good score.

If you apply for a new loan or credit card, the lender looks at more than just your total score. Normally, lenders run your full credit report and review your various balances and payment history for any red flags. Maxed-out cards are a major concern for a new lender as it appears you have no spending discipline and are trying to get new credit because you are desperate. Some of your existing card issuers might also see that you have a maxed-out card and lower your limits to keep you from taking on more debt than you can repay. This also raises your debt-to-limit ratios since your amount of available credit falls. The maxed-out card provider might decide to lower your limit as you pay down the balance, too.

Maxed-out cards present other problems as well. The higher your balance on a card, the more your minimum monthly payment. This makes it more difficult to keep up with payments and limits your free cash flow going forward. Plus, higher balances take longer to pay off, which means you also pay more in interest over time. Finally, walking around with a maxed-out card in your wallet is risky. One wrong swipe of the card could send you over the limit, bringing on overlimit fees and higher interest rates. Similarly, an automatic payment you forget about could send you over.

Obviously, there are a lot of reasons it is not OK to max out a card. One scenario in which maxing out a card might make sense is when you get a great promotional rate and use it to pay off other balances. Card providers routinely offer new borrowers with decent credit opportunities to transfer balances with a zero percent annual interest for the first six to 18 months. If you have a $10,000 limit and use most of it to move debt from cards that have rates of 15 to 25 percent, you can save a lot in interest. This is most sensible when you know you can quickly pay down the balance to avoid interest charges on the new card.

Neil Kokemuller has been an active business, finance and education writer and content media website developer since 2007. He has been a college marketing professor since 2004. Kokemuller has additional professional experience in marketing, retail and small business. He holds a Master of Business Administration from Iowa State University.


How Credit Card Companies Make Money

Maxing out credit card and paying in full

. and how consumers can work the system to their favor.

Credit card issuers make money in a few different ways, like taking a small cut of each purchase you make. Photo: Visa

As a longtime credit card user (paying with #8212; and paying off #8212; cards since age 18), I’ve never really identified with the “credit cards are evil” mantra that seems to plague public opinion. I#8217;ve cashed in points for airfare so my wife could get away for the weekend, and redeemed points for gift cards to give to clients. However, because I see so many reader comments detailing bad experiences with credit cards, I decided to do some investigating.

I found that the torch-and-pitchfork mob is often led by people who feel they#8217;ve been sucked into credit card companies#8217; business models of deception, luring customers into paying high interest rates and late fees. But while interest rates and late fees are key revenue sources for credit card companies, by and large, they’re not exactly predatory practices.

Businesses need to make money. It’s our job as consumers to understand the various incentives and disincentives of the products we use so we can make informed decisions about our own money, and whether a business#8217;s services are worth what we pay for them. Consumers need to understand how these companies operate in order to use their credit cards conscientiously and avoid destructive behavioral spirals.

Let’s explore the facts behind how credit card companies make their money and how you can use this information to make smarter financial choices.

A Credit Card Company#8217;s Top Revenue Streams (and How They Affect You)

The revenue stream: When consumers pay for something using a credit card, they often assume that the retailer receives the entire payment. However, a small percentage of most credit card purchases (roughly 2% or more) gets gobbled up in credit card interchange fees. The bulk of that goes to the bank that issued the card used (for example, Chase or Capital One), while a portion also goes to the credit card association managing the account, such as Visa or MasterCard. (Those companies also charge their partner banks fees for their services, further adding to their revenue.)

Meanwhile, American Express issues its own cards and operates under a #8220;closed-loop#8221; network, meaning it acts as both the card issuer and the credit card association (as opposed to Visa or Mastercard). AmEx#8217;s chief revenue stream is the fee it charges merchants who accept its cards, which account for a staggering 65% of the company#8217;s revenue.

What this means for you: Interchange fees don#8217;t really impact consumers as much as they do merchants, who receive only $97-$98 of a $100 credit card purchase. But even some very small businesses want to be able to accept credit cards to make it easier for their customers to make a purchase, so they are typically willing to pay credit card companies for their services.

While this may seem like an exploitative tactic, the credit card companies act as intermediaries for all parties involved in the transaction: issuing banks, cardholders, and merchants. They handle the complex behind-the-scenes components, including secure financial transfers and fraud monitoring, which is why they can demand these fees. As a consumer, of course, it means you don’t have to carry around a wad of cash or a checkbook to make purchases at most stores and restaurants.

What you can do about it: If you really want your local coffee shop to receive 100% of your purchase, then pay cash. One thing to keep in mind is that some retailers will add a 2%-3% surcharge on Visa and MasterCard transactions — which comprise 70% of all credit cards — to cover the interchange fees those companies charge. Luckily, merchants are required to disclose any credit card surcharges upfront and detail that extra fee on your receipt.

Keep a watchful eye out for surcharges when you pay with credit. Utility companies or government agencies such as the DMV will often add a surcharge if you use a credit card. I try to avoid using a card anywhere that adds this charge.

The revenue stream: While merchant fees make up a good portion of credit card companies’ revenue streams, they also collect fees from their cardholders — including annual, cash advance, balance transfer, and late fees.

For instance, let’s say you’d like to move your balance on one card to another with a lower interest rate. Most companies will levy a 3% balance transfer fee on your transaction #8212; so if you want to transfer $5,000, you’ll have to pay $150 upfront.

What this means for you: Consumers who haven’t read the fine print are often shocked to discover the number of fees companies charge. Not only will they drive up your credit card bill, but incurring certain fees, like late fees, will damage your credit score, too. Keep in mind that fees can vary by card and issuer, so just because one company or one card doesn’t charge an annual fee, for example, that doesn’t mean another won’t.

What you can do about it: Make sure to find out whether there’s a fee and how much it is before you apply for a new card. Depending on your credit limit and the rewards program, that expense may outweigh the benefits.

Credit cards often come with a range of useful services such as balance transfer offers and cash advances. These can be incredibly helpful in a financial pinch, but they’re not without their costs. A cash advance might seem like the answer to your short-term money problems, but you could be paying that off for years. Talk to your credit card company about the charges, and look for alternative solutions that won’t cause you stress down the road.

If you plan to use a credit card while traveling overseas, research different companies’ foreign transaction fees. These can seriously increase your travel expenses if you’re not careful, so look for cards with low or no fees on international purchases.

Annual fees aren’t fun to pay, but they aren#8217;t the enemy, either; some of the best rewards credit cards charge annual fees. Personally, I have about six credit cards that I use for specific purchases. When I’m deciding to open any new card, I always ask myself, “Does this offer a good return on investment?” A great rewards card might be worth a high annual fee if you use it enough.

Whatever your credit card situation — whether you pay your balances off each month or can only make the minimums for the time being — don’t ever make payments late. This is a careless consumer mistake that creditors make money off of, because they will charge late fees that can really add up on your total bill. It can also trigger an unwanted increase in your interest rate #8212; which we#8217;ll look at next.

The revenue stream: Interest payments undoubtedly provide credit card companies with handsome revenue — especially off of missed payments. A recent survey of 100 major U.S. credit cards found that consumers who fall two months behind on their credit card payments face an average penalty interest rate of 28.45%.

So let’s say you carry a $6,000 balance on your card charging 11.82% — the average APR. At the 28.42% penalty APR, you would have to pay nearly $1,000 extra in interest per year.

In 2014 alone, American Express made a net interest income of approximately $5.8 billion!

What this means for you: Because just a few missed payments can quickly spiral into serious debt, consumers often mistakenly assume that credit card companies want them to get in too deep. After all, that means more profits for the creditors, right?

In truth, while credit card companies do profit from the interest that accrues on overdue accounts, they don’t design their systems to trick customers. The more spending power cardholders have, the more money these businesses make, whether they carry high-interest balances or not. That’s why they provide cardholders with the options to set up automatic monthly payments and send out reminder notices ahead of their due dates.

What you can do about it: Set your account to send reminder alerts via text or email before your bill is due each month, and always pay your balance in full. And while credit card companies make it easy to pay, they can’t stop you from buying things you don’t need or can’t pay off. So every time you’re about to charge something to your credit card, ask yourself, “Can I pay this off on my next bill?”

If the answer is “no,” wait until you’re in a more comfortable financial position. Even a small purchase can quickly become a burden when you account for the interest over time. And paying the monthly minimums won’t help you once you’ve racked up enough interest on the debt. You also want to avoid maxing out your cards, because carrying high balances lowers your credit score.

Treat your credit cards like the finite amount of cash you carry in your wallet. In doing so, you won’t get sucked into the trap of buying more than you need — or can afford.

The revenue stream: Some credit card companies sell customers’ data to other businesses — particularly retailers that would like to garner better insights into consumer spending habits. Both American Express and MasterCard have profited off of this tactic. MasterCard sells data by ZIP code, which tells retailers what areas are more likely to make purchases. Then, online advertisers can take this data and create targeted advertisements.

What this means for you: Luckily, the data is anonymous and aggregated, meaning companies can’t single you out. However, many consumers aren’t happy to know that companies are profiting off of their personal information.

What you can do about it: This practice is, thankfully, on the decline. Make sure to read card agreements thoroughly to find out whether a specific company will profit off of your data and whether you can opt out.

When used responsibly, credit cards offer numerous benefits. Whether you simply don’t like carrying cash or you’re trying to build credit history, they’re convenient and valuable tools.

But there’s something to be said about their ability to separate you from your money. It’s easy to get carried away with your credit lines and blame credit cards for capitalizing on fees while you’re one late payment away from the poor house.

Credit card companies are out to make money #8212; there’s no doubt about that. But it’s important for consumers to understand how those businesses make money, and where their own responsibilities lie.

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