How to Avoid Common Investing Mistakes and Pitfalls

 

Credit cards can be our best friends or our worst enemies. It all depends on how we use them. In this blog, we will explore the six golden rules you want to follow when it comes to using your credit cards, so you become their master—not the other way around. If you're new to the channel, my name is Tae from Financial Tortoise, where we learn to grow our wealth slow and steady.

1. Pay Off Your Credit Card In Full Every Month

The number one golden rule for using your credit cards wisely is to pay off your credit cards in full every single month. If you take only one piece of advice from this blog, I would say this is the most important one of them all.

There are two primary reasons for ensuring that you pay off your credit card in full every month:

• Avoid Paying Interest: Credit card interest rates are known for being notoriously high. The average interest rate on a credit card today is about 15%. If you were to only pay the minimum on a £20,000 credit card debt, it would take you about 47 years to completely pay off that debt. The total interest you would have paid to the credit card company in this scenario could be around £33,000. When you're only paying the interest on the credit card, you're really paying a high price for the privilege of using their service, and there is no situation where this is worth it.
• Build Good Credit: Your payment history is one of the biggest factors that make up your credit score, representing 35% of your overall score. Therefore, the single most important thing you can do to improve your credit is to pay your bills on time. Lenders like prompt payers, so don't give your credit card company the opportunity to lower your credit score by being a few days late with your payment. Setting up automatic payments can help ensure that your full amount is paid on time every due date.

2. Request Fee Waiver

The second golden rule to using your credit cards wisely is to request a fee waiver whenever you can or at least request some other incentive if you have to keep paying the annual fee. The best time to do this is when you're getting closer to paying the annual fee each year.

Remember, banks want to keep you as their customer, so make them earn your business. There is no shortage of credit card companies in the market; they are constantly competing to gain new customers and retain existing ones. If they feel like they are going to lose you because of the annual fee, they'll do whatever they can to keep you.

I have done this often, especially with my most expensive credit cards. To be honest, it doesn't work every time, but they often will throw in some incentive to soften the blow. For example, with my American Express Platinum Card, they weren’t willing to waive my annual fee, but they were willing to provide additional points if I remained a customer. These additional points allowed me to either get a free flight or a free hotel night.

The worst that can happen is a "no," but it never hurts to ask. When I was courting my wife in my 20s, the first time I asked her out, she flat out said "no." Did I go home and curl up in a ball and cry? Maybe, maybe not—let's not judge. However, I gathered up my courage and approached her again a few months later. This time, I tried not to be so creepy. She didn’t say "yes," but she also didn’t say "no" right away, so in my book, it was a win. I eventually convinced her to give me a chance, and 10 years later, she's still with me.

So, don’t be afraid to ask the question. The worst thing that can happen is a "no." But if you can learn anything from my dating story, it's that with persistence, things can work out in your favour better than you expected. Not only do you get to save hundreds of dollars in fees, but you also get to enjoy all the credit card benefits for free, all from just asking one question.

3. Don’t Cancel Your Cards

The third golden rule to using credit cards wisely is not to cancel your cards, especially the ones you’ve held for a long time. Lenders like to see a long history of credit, which means that the longer you hold an account, the more valuable it is for your credit score. Therefore, even if you have a card that you rarely use anymore, it might be worthwhile to keep it around.

Note that credit card companies will often cancel your account after a certain period of inactivity. To avoid having a card you rarely use shut down, set up a small recurring expense and automatic payments on it. For example, I set up one of my credit cards to pay my £12.99 monthly Spotify subscription. This requires almost zero ongoing work on my part, but my credit report reflects that I’ve had that card for more than 10 years, which improves my credit score.

4. Keep It Simple

The fourth golden rule to using credit cards wisely is to keep things simple. I love credit card hacking, which involves using credit cards for free flights and hotel rooms. Therefore, I have more credit cards than the average person. However, even with all my credit cards, I try to keep things as simple as possible when it comes to maintaining and managing them. I recommend having no more than one hotel credit card or one airline credit card.

I know friends who have opened over 20 to 30 cards to take advantage of sign-up bonuses. Take it from me: managing your credit cards can be more complex than managing a multi-figure investment portfolio. When you have tons of credit cards, you not only need to keep track of multiple payments but also the various benefits that come with each card. You have to remember how specific reward points work, when they expire, and so forth. It’s hard enough managing just a few cards; when you have 10 or more, it can really get out of hand, and you might end up paying more than you're receiving.

While I mentioned earlier that you shouldn't cancel your cards, if you find yourself swamped with the number of cards you have, go ahead and close the ones that are less active. As long as you're paying your balances on time and have good overall credit, the long-term impact of closing some accounts will be minimal. Most importantly, you'll sleep easier at night with a simple system you can easily wrap your head around.

5. Request a Credit Limit Increase

The fifth golden rule to using credit cards wisely is to request a credit limit increase. And don’t take this the wrong way—I'm not saying you should request more credit so you can spend more money. This actually relates to something called your credit utilization rate.

Your credit utilization rate is simply how much you owe divided by the available credit. We want to improve this number because it makes up 30% of our credit score. Let’s go through an example: let’s say you have a credit card with a £3,000 total available credit, and you max it out at £3,000. In this scenario, your credit utilization rate is 100% (£3,000 divided by £3,000). However, if you're able to get your credit limit increased to £10,000, your credit utilization ratio improves to 30% (£3,000 divided by £10,000).

When it comes to credit utilization, lower is better. Lenders don’t want you to regularly spend all the money you have available. People who frequently spend all their available credit tend to default, which makes them high-risk individuals from a bank's perspective. To improve your credit utilization rate, you can choose to spend less on your credit cards, but the easier solution is to request more credit. Again, this doesn’t mean you should go and spend more; you’re doing this primarily to increase your credit utilization rate and thus your credit score.

6. Maximize Your Credit Card Benefits

The sixth golden rule to using credit cards wisely is to maximize all your benefits—every single one of them. Many credit cards offer rewards programs that give you cash back, free hotel nights, and other benefits, but most people don’t take full advantage of all the free stuff that comes with credit cards.

For example, when I wanted to take my family on an overnight vacation recently, I was able to redeem a free night certificate on my higher credit card, saving me over £300 in hotel expenses. That’s probably the easiest example, but let me share several more that many people might not even realize they already have with their existing credit cards:

• Additional Warranty: A lot of cards extend the warranty on your purchases. If you buy a new MacBook and it crashes after the manufacturer's warranty, it might still have some coverage through your credit card.
• Free TSA Pre-Check and Global Entry: If you have a travel credit card, there’s a good chance that it covers the fee for TSA Pre-Check or Global Entry applications, usually every four years. This can make your travel experience significantly better.
• Trip Cancellation Insurance: If you book tickets for a vacation and then get sick, your airline could charge you expensive fees to rebook your flight. However, if you purchased the tickets with a credit card that has trip cancellation insurance, they will cover those change fees.

Credit cards are by no means without their dangers. However, if you can follow these golden rules, you can beat the house and gain all the benefits of owning credit cards while mitigating their downside risks. Thank you for reading! If you'd like to learn more about some of my favourite travel credit cards, check out my video here. Until next time, all the best!