Credit cards can be useful tools when used responsibly, but they can have a devastating effect on your creditworthiness and financial health if used incorrectly. Unfortunately, with credit cards it’s easy to find yourself on a slippery slope, but it’s not too late to turn it around by making smart decisions and avoiding bad habits.
Here are seven bad credit card habits to avoid if you want to get the most out of your credit cards.
1. Default in payment
Late payment can have serious consequences. For starters, there could be late fees of up to $ 35 and a potential interest rate hike. In addition, if your payment is more than 30 days late, the major credit reporting agencies – Equifax, Experian, and TransUnion – can add default interest to your credit report that can remain there for seven years. This can affect your ability to achieve or maintain good credit.
If you often forget your due date, consider creating a reminder on your phone or setting up automatic payments. If you are unable to make payments on time due to lack of funds, you can request a new due date from your card issuer that better fits your payment schedule.
2. Pay only the minimum amount
Paying only the minimum amount of your credit card payment is like kicking the can on the street. Technically, you are making some progress, but you really don’t get much in the long run.
If you only pay your minimum balance, you will not have to pay back your balance and you will likely pay more interest than you would like. In addition, paying the bare minimum can negatively impact your credit by increasing your credit utilization. Loan Utilization is the percentage of your total credit that you use and makes up 30 percent of your FICO credit score. Experts generally recommend keeping the loan utilization rate between 10 and 30 percent so they don’t affect yours credit-worthiness.
Pay more than the minimum whenever you are able. The best practice is to pay your bill in full each month so you don’t have any credit with you. Depositing as much as you can into your monthly payment will reduce the balance that you carry over to the next month and lower the interest cost. Even if it’s a small amount, you’ll be surprised how quickly that little extra can add up.
Use Bankrate’s credit card payout calculator to play with the numbers and see how fast you can cash out your credit card.
3. Accept cash advances
Getting a cash advance is quick and easy, but chances are it isn’t worth the convenience. Many card issuers charge a higher interest rate for cash advances than for regular purchases. And in contrast to the Payment term Issuers offer to buy (as long as you have no credit), you will not be given a grace period to repay a cash advance. The interest on cash advances starts running immediately.
And as if that wasn’t enough, you will likely face a one-time cash advance fee, which is typically around 3 percent of the cash amount. That is, if you received a cash advance of $ 400, you would have to pay a fee of $ 12 for that privilege.
4. Using the wrong credit card
One reason credit cards are attractive to consumers is the rewards and perks they offer, such as cashback for purchases and airline miles. While taking advantage of credit card rewards is a popular and potentially lucrative strategy, failing to match the cards with your spending pattern or not using the rewards of your cards means that you can effectively leave money on the table.
For example, you probably don’t want to use a rotating bonus category card like that Discover it® Cash Back as your daily grocery menu. That’s because you only have three months a year (usually January through March, depending on Discover cashback calendar). For the rest of the year, you would only earn 1 percent cashback. You are better off with the for daily needs American Express Blue Cash Preferred® card, which brings in an unprecedented 6 percent cashback on groceries up to $ 6,000 per year, followed by 1 percent cashback.
Here’s another example: If you don’t travel or eat out regularly, it probably doesn’t make sense to pay an annual fee of $ 550 for that Chase Sapphire Reserve®, or $ 250 for that American Express® Gold Card, as both cards have rewards heavily geared towards travel and food, two of the most popular rewards card categories. You’re probably better off with an all-purpose, flat-rate cashback card like the new one Wells Fargo Active Cash℠ card, which offers unlimited 2 percent cash rewards for purchases.
Reward cards are a fantastic way to get perks for topping up purchases that you would have made anyway. However, be careful not to use the card solely for points or miles, and practice good habits with your reward card.
5. Closing older credit card accounts
Many people believe that closing an unused credit card will do so improve their creditworthiness. However, the length of your credit history accounts for 15 percent of your creditworthiness, and high credit performers typically have long credit histories
Closing an older account can have a negative impact as it will lower the average age of your accounts. For example, suppose you have had one credit card for six years and another card for two years. The average age of your credit history is four years. However, if you close the older card, you will only have a single two-year account, effectively reducing the age of your accounts to two years.
Closing a credit card or credit account can affect your credit score, but it may not have an immediate impact. It all depends on the scoring model VantageScore or FICO. VantageScore may not consider 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 impact on the length of your credit history as a closed account will remain on your report for seven to ten years (depending on the status at the time of closure).
Think twice before closing an older credit card, especially your oldest. Of course, it makes sense to cancel your credit card if it has a high annual fee that the rewards on the card don’t recoup, but it is worth looking into other options such as credit card payments a product change or a downgrade before closing the account entirely.
6. Do not return the balance during a 0% Promotional APR offer
A Credit card with 0% APR for an introductory phase, you get instant access to funds and the ability to use them interest-free as long as you settle your balance before the introductory phase ends. Unfortunately for a lot of people this goes wrong.
If you do not pay the balance before the end of the promotional period, often up to 18 months for the best cards and sometimes more, the card’s regular interest rate – the The current average APR on cards is north of 16 percent – occurs. This new tariff applies to new purchases and any unpaid balances remaining after the introductory period.
A smart plan for repaying intro APR card credits is to charge a monthly payment that results in the full repayment of the debt before the end of the promotional period. For example, let’s say you have $ 1,500 in debt on your card and an introductory interest rate of 0 percent for 15 months. By making sure you pay at least $ 100 each month for the duration of the introductory offer, you’ll pay off your balance before any interest accrues.
7. Continuous transfer of debt to new balance transfer cards
Credit transfer credit cards with an effective APR of 0 percent offer an excellent opportunity to pay off high-interest credit card debts. And while we don’t always recommend transferring funds multiple times, it can make sense if you have a disciplined debt reduction plan and know that you won’t be debt free until the first introductory APR period is up. In this case, a second balance transfer gives you the opportunity to continue to repay your debts interest-free and save a lot of money in the process.
On the other hand, if you open new credit cards frequently and only make the minimum payment, you are not pay your debts. Additionally, you are likely to amass a ton of credit transfer fees along the way. It is a mistake to keep moving debt from one credit card to another without making significant progress in paying off your debt.
Instead of risking a potentially endless cycle of credit card payments, consider a personal loan instead. The credit requirements for personal loans are often milder than for credit cards, and the interest rates are usually significantly lower. Sure, you have to pay interest on an installment loan, but at least your installment loan has a defined end date, so you know exactly when you will be out of debt.
If you have a new prepaid transfer card or are considering getting one, The account balance transfer calculator from Bankrate can help you determine the time to pay off your debt.
The bottom line
There are many benefits to being able to use credit cards wisely, and knowing the above pitfalls can help you make wise decisions about managing your credit cards. The occasional slip-up, like pulling out your fuel card at the grocery store or paying a minimum amount for a month, won’t completely upset your financial life. However, it is important to avoid making the same credit card mistakes over and over again.