Credit cards can be beneficial tools when used responsibly, but they can wreak havoc on your credit score and financial health when misused. Unfortunately, it’s easy to find yourself on a slippery slope with credit cards, but it’s not too late to turn the tide by making wise choices and avoiding bad habits.
Here are seven bad credit card habits you should avoid if you want to get the most out of your credit cards.
1. Make late payments
Making a late payment can have serious consequences. For starters, you could incur late fees of up to $ 35 and a potential increase in interest rates. Plus, if your payment is more than 30 days late, the major credit bureaus – Equifax, Experian, and TransUnion – might add a late payment mark to your credit report that could stay there for up to seven years. This can affect your ability to get or keep good credit.
If you often forget your due date, consider setting up a reminder on your phone or setting up automatic payments. If it’s a lack of funds that is preventing you from making payments on time, you can ask your card issuer for a new due date that better fits your pay schedule.
2. Pay only the minimum due
Paying only the minimum owed on your credit card payment is a bit like kicking the box down the road. Technically, you’re making progress, but you’re not really accomplishing much in the long run.
Likewise, if you only pay your minimum balance, you are not progressing towards paying off your balance and you are probably paying more interest than you want. Additionally, paying only the minimum could negatively impact your credit by increasing your use of credit. Credit usage is the percentage of your total credit that you use and represents 30% of your FICO credit score. Experts generally recommend keeping your credit utilization rate between 10% and 30% to prevent it from impacting your credit score.
Pay more than the minimum whenever you can. The best practice is to pay your bill in full each month so you don’t carry a balance. Putting as much as possible on your monthly payment will reduce the balance you carry over to the next month and lower interest charges. Even if it’s only a small amount, you’ll be surprised how quickly that little extra can add up.
Use Bankrate’s Credit Card Refund Calculator to play with the numbers and see how quickly you can pay off your credit card.
3. Take cash advances
Getting a cash advance is quick and easy, but it’s likely not worth it. Many card issuers charge a higher interest rate for cash advances than for regular purchases. And, unlike the grace period offered by issuers for purchases (as long as you don’t have a balance), you won’t receive a grace period for repaying a cash advance. Interest on cash advances begins to accrue immediately.
And if all that wasn’t enough, you’ll likely have to pay a one-time cash advance fee, usually around 3% of the cash amount. This means that if you get an advance of $ 400, you will be subject to a fee of $ 12 for the lien.
4. Using the wrong credit card
One of the reasons credit cards appeal to consumers is the rewards and perks they offer, such as cash back rewards on purchases and airline miles. While taking advantage of credit card rewards is a popular and potentially lucrative strategy, if the cards don’t match your spending habits or if you aren’t using your card rewards, you could actually be leaving money behind. on the table.
For example, you probably don’t want to use a rotating bonus category card like Discover it® Cash Back as your everyday grocery card. That’s because you would only earn the maximum 5% cash back for groceries for three months of the year (usually January through March, according to Discover’s cash back schedule). The rest of the year, you would only earn 1% cash back. For everyday groceries, you’re better off using the American Express Blue Cash Preferred® card, which gives you unprecedented 6% cash back on groceries up to $ 6,000 per year, then 1% cash back thereafter.
Here’s another example: if you don’t travel or dine regularly, it probably doesn’t make sense to shell out an annual fee of $ 550 for the Chase Sapphire Reserve®, or $ 250 for the American Express® Gold card. , since both rewards cards are heavily geared towards travel and dining, two of the most popular bonus categories for rewards cards. You’d probably be better off with a general-purpose card with a flat-rate cash back rate, like the new Wells Fargo Active Cash℠ card, which offers unlimited cash rewards of 2% on purchases.
Reward cards are a fantastic way to get rewards for purchases you would have made anyway. Be careful not to abuse the card just for points or miles, and practice good habits with your rewards card.
5. Closing old credit card accounts
Many people believe that closing an unused credit card will improve their credit. However, the length of your credit history is 15% of your credit score, and people with high credit scores tend to have long credit histories.
Closing an old account can have a negative impact by lowering the average age of your accounts. Suppose you’ve had a credit card for six years and another for two years. The average age of your credit history would be four years. But if you closed the old card, you would only have one two-year account left, reducing the age of your accounts to two years.
Closing a credit card or loan account could affect your credit score, but it might not have an immediate effect. It all depends on the scoring model, VantageScore or FICO. VantageScore may not include closed accounts when calculating your credit score, so closing an account could lower the average age of your credit accounts and negatively affect your score. FICO, on the other hand, includes both open and closed credit accounts in its score calculations. Closing a credit account may not have an immediate effect on the length of your credit history, as a closed account will remain on your report for seven to 10 years (depending on its position at closure).
Think twice before closing an old credit card, especially the oldest one. Of course, it makes sense to cancel your credit card if it has a high annual fee that is not recouped by the card’s rewards, but it is worth exploring other options, such as a product change. or a demotion before completely closing the account.
6. Do not reimburse the balance during a promotional APR 0% offer
A 0% APR credit card for an introductory period gives you immediate access to funds and the ability to use them without interest, as long as you pay off your balance before the introductory period expires. Unfortunately, this is where it goes wrong for a lot of people.
If you don’t pay off the balance by the end of the promotional period, often up to 18 months on better cards and sometimes more, the card’s regular interest rate – the current average APR for cards is north of 16% – effective This new rate will apply to new purchases and any outstanding balance after the introductory period.
A smart plan to pay off introductory APR card balances is to calculate a monthly payment that results in full debt repayment before the promotional period expires. Suppose you have $ 1,500 in debt on your card and an introductory interest rate of 0% for 15 months. If you make sure you pay at least $ 100 per month during the term of the introductory offer, you will pay off your balance before accruing interest.
7. Perpetual Debt Transfer to New Balance Transfer Cards
0% promotional APR balance transfer credit cards are a great way to pay off high interest credit card debt. And, while we don’t always recommend transferring a balance multiple times, it can be a good idea to follow a disciplined debt reduction plan and know that you won’t be free from your debt until the first period is over. introduction of the APR. In this case, a second balance transfer would give you the option of continuing to pay off your debt without interest, saving you a lot of money.
On the other hand, if you frequently open new credit cards and only make the minimum payment, you are not. pay off his debt. Plus, you’re probably racking up a lot of balance transfer fees along the way. It’s a mistake to keep transferring debt from one credit card to another if you aren’t making significant progress in paying off your debt.
Rather than risking a potentially endless cycle of credit card payments, you may want to consider taking out a personal loan. Credit requirements are often milder with personal loans than with credit cards, and interest rates are generally much lower. Of course, you’ll have to pay interest on an installment loan, but at least your installment loan will have a set end date, so you’ll know exactly when you’re debt free.
If you have a new balance transfer card or are considering getting one, Bankrate Balance Transfer Calculator can help you determine how long it will take to pay off your debt.
The bottom line
There are a lot of benefits to using credit cards wisely and being aware of the pitfalls above will help you make wise choices when managing your credit cards. An occasional mistake, like picking up your gas card at the grocery store or making only a one-month minimum payment, isn’t going to completely derail your financial life. But it’s important to avoid getting stuck making the same credit card mistakes over and over again.