Credit cards can be a useful tool if used responsibly. However, if used incorrectly, it can wreak havoc on your credit score and financial position. Even if you find yourself on a slippery slope with your credit card, you can turn things around by making smart choices and avoiding bad habits.
Here are eight bad credit card habits to avoid if you want to get the most out of your credit card.
1. Late payment
Late payments can have serious consequences. For starters, there could be late fees of up to $35 and a potential rate hike from the issuer. If you are more than 30 days late on a payment, your credit report may be marked as late payment by the major credit reporting agencies (Equifax, Experian, TransUnion), and this mark can remain there for up to 7 years.
This can affect your ability to obtain or maintain good credit, which in turn may qualify you for more credit or loans in the future.
If you often forget due dates, consider creating reminders on your phone or setting up automatic payments. If your payment is behind due to insufficient funds, you can request a new due date from your card issuer to fit your payment schedule.
2. Pay only the minimum fee
Paying only the minimum balance required for credit card payments is like kicking a can.
If you’re only paying the minimum balance, you’re not progressing to pay off your balance and you may be paying more interest than you should. Not only that, paying only the minimum amount can lead to high credit utilization, which can negatively impact your credit. occupy. Experts generally recommend keeping your credit utilization between 10% and 30% so as not to affect your credit score.
Pay more than the minimum amount whenever possible. Best practice is to pay your bill in full each month so you don’t have a balance. Putting as much as possible into your monthly payments will reduce the balance that rolls over to the next month, which will reduce your interest burden. Even if it’s just a tiny amount, you’ll be amazed at how quickly that little extra adds up.
Use Bankrate’s Credit Card Payoff Calculator to determine how quickly you can pay off your credit card.
While cash advances are quick and easy to use, they are often inconvenient. Many card issuers charge higher interest rates for cash advances than for subscriptions. Also, unlike the grace period offered by the issuer for purchases (unless there is a balance), there is no grace period for repaying cash advances. Interest on cash advances starts accruing immediately.
If that’s not enough, you’ll have to pay a one-time cash advance fee (usually around 3% of your cash). So if you redeem a $400 cash advance, you will be charged a $12 fee for that offer.
4. Using the wrong credit card
Benefits and perks such as cashback on purchases and airline miles are one of the biggest benefits of using credit cards. Rewards cards are a great way to get benefits to recharge for purchases you would have made anyway. , leaves no money on the table.
For example, if you spend most of your monthly budget on groceries, you can choose a card such as American Express’s Blue Cash Preferred® Card. Get an unparalleled 6% cash back when you shop for groceries at US supermarkets. Spend up to $6,000 annually and get 1% cash back thereafter.
On the other hand, you wouldn’t want to use a rotating bonus category card like Discover it® Cash Back as your daily grocery card. Earn 5% cash back when you activate in a quarterly rotating category (up to $1,500 on purchases, then 1%) and 1% cash back on all other purchases. So, for three months out of the year (usually his January-March, depending on Discover’s cashback calendar), only when your grocery spending goes into rotation will you reach your maximum cashback amount on groceries. You can earn Other years, you’ll only get 1% cash back on your grocery spending.
Here’s another example: The $550 annual Chase Sapphire Reserve or $250 American Express® Gold Card are great value if you travel and eat out regularly. However, if these aren’t your top spending categories, you may not earn enough to outweigh the hefty annual fee. Better go for a generic card that offers a flat amount of cash back, like the Wells Fargo Active Cash® Card.
However, be careful not to overuse your card just for points and miles, and use your loyalty card to develop good habits.
5. Close Old Credit Card Accounts
Many people believe that closing unused credit cards improves their credit. However, closing your account can have a significant impact on the length of your credit history. This factor accounts for his 15% of your credit score, and people with high credit scores tend to have long credit histories.
Closing older accounts can have a negative impact as the average age of accounts decreases. Simply put, you’ve had one credit card for 6 years and another for 2 years. The average age of your credit history is 4 years. However, canceling the old card leaves only one account valid for two years, effectively shortening the validity of the account to his two years.
Closing your credit card or loan account may affect your credit score, but it may not affect you immediately, depending on whether your score comes from VantageScore or FICO. VantageScore may not include closed accounts when calculating your credit score, so closing an account can reduce the average age of your credit account and negatively impact your score. FICO, on the other hand, includes both open and closed credit accounts in its scoring calculations. Closed accounts remain on report for 7-10 years (depending on their state at the time of closure), so closing a credit account does not immediately affect the length of your credit history.
Think twice before closing old credit cards, especially the oldest ones. Of course, if your credit card has a high annual fee that you can’t recoup with your card’s rewards, it makes sense to cancel your credit card, but before closing your account permanently, you should avoid other things, such as switching products or downgrading. It’s worth considering other options.
6. Do not repay before 0% APR offer ends
A 0% APR credit card gives you instant access to a line of credit, but no interest will be charged on your balance throughout the introductory period. This means that you may be able to use your new card interest-free as long as you pay off your balance before the referral period ends. Otherwise, the interest rate will start at the running rate.
Some of the best 0% annual rate cards offer up to 18 months interest free, but interest will accrue on the remainder if the balance is not paid off before the promotional period ends. And with the card’s current average APR approaching 20%, it could quickly become expensive.
A sensible plan to pay off your APR card balance is to calculate how much you need to pay each month to pay it off in full before the promotional period ends. For example, if your balance is $1,500 and your referral interest rate is 0% for 15 months, you must pay at least $100 each month for the duration of your introductory offer to avoid interest.
7. Transfer your debt permanently to your new balance transfer card
A balance transfer credit card is a great way to pay off high interest credit card debt within the initial 0% period. We don’t always recommend transferring balances multiple times, but if you’re following a disciplined debt reduction plan and know you won’t be debt free before the end of the initial introductory APR period. , it might make sense. In that case, a second balance transfer gives you the opportunity to continue paying off your debt interest-free, saving you a lot of money in the process.
On the other hand, if you keep opening new credit cards and making minimal payments, you won’t make much progress. pay off your debtAdditionally, you may encounter many balance transfer fees along the way. It’s a mistake to keep moving debt from one credit card to another when you’re not making significant progress on your debt payments.
Rather than risk a potentially endless credit card payment cycle, consider taking out a personal loan instead. Personal loans may have looser credit requirements than credit cards, and interest rates are usually much lower. Sure, you have to pay interest on an installment loan, but at least an installment loan has a defined end date so you know exactly when you’ll be debt free.
If you have a new balance transfer card or are considering getting one, Bankrate balance transfer calculator It helps you determine how long it will take to pay off your debt.
8. Buy what you can’t afford
One of the best ways to use your credit card responsibly is to only charge what you know you can repay.
It’s all too easy to shop without a plan to pay off your balance before your billing cycle ends. But by budgeting yourself, you can avoid incurring unnecessary debt. This allows you to recognize what you can afford and what you don’t. Evaluate whether you have the money to pay the full price before deciding to make a large purchase. If the answer is no, then you should wait until your finances are in order.
There are many benefits to using your credit card wisely, as long as you avoid the pitfalls and keep your spending under control. Even the occasional misstep, like pulling out a gas card at the grocery store or paying at least a month’s worth, doesn’t completely derail your financial life. Most importantly, don’t get bogged down in making the same credit card mistakes over and over again.