Paying excessive annual fees

Avoid annual fees whenever possible. Banks typically charge these fees for one of three reasons:

  • A credit card offers a rewards program such as cash back or free travel.
  • A card grants access to premium services such as advance ticket purchases.
  • A cardholder is deemed a risky borrower due to a low credit score or limited credit history.

The last of these is a sticky situation, but you can shop around for lower fees as you build (or rebuild) your credit by paying bills on time and limiting the amount of new debt you take on. The first two reasons are matters of choice. If premium services are worth the price to you, by all means pay for the privileges. But if rewards points are what you're after, be sure the value of the reward surpasses the annual fee.

Take the American Express Premier Rewards Gold card, for example. The annual fee is $175. If you charge more than $30,000 a year, you automatically receive 15,000 bonus points -- the equivalent of $150 -- which can be redeemed for gift cards, travel and other rewards. You also earn a point for every dollar charged (two points per dollar for gas and groceries). In this scenario, you'll easily recoup the annual fee. You might not, though, if you don't collect the 15,000 bonus points.

Annual fees vary by issuer, but the CARD Act caps fees at 25% of the initial credit limit. If you have, say, a limit of $500, then fees for the first year can't exceed $125. If you are unsure why you're being told to pay an annual charge, just ask. Banks now are required to tell you.

Chasing teaser rates

Before you jump at the chance to sign up for a credit card with a 0% introductory APR, make sure you understand how long the promotional period lasts and how high your rate will climb after the offer expires. While the CARD Act requires introductory rates to last at least six months, companies do not have to notify you when an offer ends.

Some introductory APRs are good for up to 21 months, but most last closer to a year. Pay bills on time every month to prevent lenders from raising rates early, and pay balances in full before rates reset to avoid interest charges. Heed any restrictions on balance transfers. Some banks exclude transfers from 0% APR offers, while others shorten the promotional period.

Weigh the impact of repeatedly tapping promotional offers on your credit scores. Too many open lines of credit, as well as too many recently opened accounts, can lower your scores. At the same time, if you constantly close old accounts and open new ones to take advantage of promotional offers, you're signaling to credit-reporting agencies that you can't keep an account open and in good standing for a long period of time.

Neglecting credit scores

The best way to pay less on your credit cards, other than keeping them in the freezer, is to improve your credit scores. But if you don't understand how your scores are calculated or you fail to pay attention to your scores at all, that can be very hard to do.

A FICO score is the most common credit score, although there are others such as the VantageScore.

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Five major factors go into a FICO score:

  • Payment history (35%)
  • Amounts owed (30%)
  • Length of credit history (15%)
  • New credit (10%)
  • Types of credit used (10%)

All it takes is a poor showing in one of these categories for your score to drop.

Say you have a long credit history and always pay your bills on time, but you typically spend 90% of your available credit limit. That percentage, or credit utilization ratio, can drag down the "amounts owed" portion of your FICO score because it signals to lenders that you're a risky borrower. Usin closer to 30% of your available credit can raise your score, because you're telling lenders you have your spending under control.

If you are denied credit or charged a higher interest rate due to your credit score, lenders now are required to provide you with a copy of your score at no cost. You should also request a free copy of your credit report from each of the three major credit-reporting agencies every 12 months at AnnualCreditReport.com. Report any errors to the appropriate agency.

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