It’s rare that you’ll find someone who doesn’t have a credit card. There are some Dave Ramsey devotees that swear by this tactic, but I am not one of them. Credit cards have a lot of great perks and a plethora of protections afforded to you. That being said, credit cards can do a lot of damage for people that use them in the wrong way. It can be a great asset, but using it incorrectly can hit you hard. I hope that you’re not making any of these mistakes.
Carrying a Balance
Have you ever heard that carrying a balance on your credit card can help increase your credit score? MYTH!!! 22% of Americans actually believe this myth. I hope that you’re not one of them. That’s ok if you are, today is the day that you change that idea. It not only hurts your credit score, but also costs you money $$$$$. Please review the blog Credit Score and How it Effects Your Finances, June 1, 2021 to delve into more specifics about items effecting your credit score. https://realpamelaferguson.wixsite.com/website/post/credit-score-and-how-it-effects-your-finances
Making Minimum Payments
Your goal should be to pay off all of your credit cards every single month. My entire childhood and early into adulthood, I thought it was the norm to just pay the minimum payment on all of my cards. Since in 1988 (when I turned 18) they gave out credit cards like water. I had cards for almost every store in the mall. It took some time and understanding to begin to carry no balance and get rid of the majority of those cards.
The majority of credit cards are compounded daily. What does that mean? That means at the end of the statement period, if you have a balance (meaning that you didn’t pay it all off), the card company will multiply it each day by a daily interest rate and add that to what you owe. The daily rate is your annual interest rate (the APR) divided by 365.
For example, if your card has an APR of 16%, the daily rate would be 0.044% (16/365). If you had an outstanding balance of $500 on day one, you would incur $0.22 in interest that day, for a total of $500.22 on Day Two. That process continues until the end of the month. If you had a balance of $500 at the beginning of the month and added no other charges, you would end up with a balance of $506.60, including interest. Of course, it’s likely that you continued to charge during the month anyway.
Missing a Payment
Being late on a credit card payment can cause your credit score to take a big hit. If you’re more than 30 days late on a payment, you should expect a 17–38-point drop. Pretty steep, huh? If you get to the point where you’re overdue 90 days, a 27-133-point drop can be expected, according to FICO data. My hope is that you are on time for every payment. However, I am aware that sometimes that’s not possible. If you are less than 30 days late, you will not take the hit on your credit report, but you will still have a late fee and added interest. It may even result in your lender increasing your interest rate, which creates a never-ending cycle of problems.
Neglecting to View Your Statement
It’s not uncommon for fraudulent activity to make its way to your credit card via random charges. It’s important to stay on top of things to protect you against fraud or even errors. I know that I’ve seen accidental duplicate charges and other random occurrences. Definitely be proactive about checking your account and making sure there aren’t any concerning items.
Not Knowing Your APR and Fees
Annual Fee: The yearly fee for just keeping your card. Be especially aware of this because many cards with an annual fee may waive the first year so you might not even realize that you have one.
Purchase APR: The annual percentage rate is simply calculated by taking the annual rate and dividing it by 12 to get your monthly rate. To calculate the daily rate, divide the APR by 365. Credit cards typically compound daily once you begin carrying a balance, meaning that every day you neglect to pay off your account in full, you will be accumulating interest. **It’s not uncommon for cards to have different rates for different kinds of purchases. For example, balance transfers. Another caveat to be aware of is that if you are late on a payment, this may allow your credit card lender to increase your APR. I know that it’s long and tedious, but it will be in the fine print in the credit card information.
Late Payment Fee: You may incur a late fee up to $29 for first time instances, but it could go as high as $40 for subsequent violations made within the previous six billing cycles. Some cards may waive this fee. If you normally pay your cards on time every month and had a boo-boo, call the credit card company because they will waive it for unusual behavior. However, you’re probably out of luck if you’re commonly late on your monthly payments.
Foreign Transaction Fees: Depending on your card, they may require you to pay foreign transaction fees on all charges outside of your home country. This is typically 3%. Check with your personal cards. I know that one of mine does not have a fee, but the other does. Before traveling, make sure you are aware of this.
Balance Transfer Fee: For transferring balances, you will likely incur a 3-5% fee for doing so. It varies by card, so check with your credit card lender for more specifics.
Taking Out Cash Advances
Cash advances differ from standard purchases. Interest begins accruing on purchases after your payment due date and you do not pay it off in full. Cash advances begin accruing interest immediately. There is no grace period, even if you pay it all off when your payment is due. Also likely is that you’ll incur an additional cash advance fee that is commonly 5% of your advance, increasing the amount even more.
Not Understanding Introductory APR Offers
To attract new customers, credit cards typically offer a TEMPORARY 0% introductory period where you won’t be charged interest on new purchases and balance transfers for a specified time period. It may seem like the perfect time to make some charges taking advantage of the interest situation, but only do that if you’re able to pay it all off before the end of the introductory period. Make sure that you are also aware of what the APR will be after the initial introductory period.
Maxing Out Your Credit Card
Using the majority or all of the available credit is never a good idea. Your utilization rate (amount borrowed versus total available credit) will be very high and will adversely affect your credit score. The lower your rate, the better your score. If you always charge close to your maximum every month and pay it off every month, you should have no problem asking (and being approved for) a credit limit increase. This will reduce your utilization rate and increase your credit score.
Applying for Credit Cards Too Often
Every time that you apply for additional credit, the inquiry appears on your credit report. If you have a lot of inquiries within a short time period, the greater risk you appear to lenders. They are worrying that you’re struggling financially trying to gain credit to do a large amount of charging. A good rule of thumb is to not apply for credit more than one time every six months. There are prequalification forms, which allow you to check your credit whether you will be approved for a credit card before applying. https://www.cnbc.com/select/how-to-check-your-approval-odds-for-a-credit-card-without-hurting-your-credit/
Closing a Credit Card
One of the factors in determining your credit score is the length of time that you’ve held a credit card. Being that when you close a card, the average length of your credit history is affected. When you’ve had one card for 10 years and one that you’ve had for 3 years, if you close the 10-year-old card, your age of credit reduces to 3 years. Overall, you should avoid closing a credit card, but especially NOT your oldest cards. One exception would be when you’re charged an annual fee that isn’t outweighed by the card’s benefits.
Loaning Out Your Credit Card
When loaning your credit card to someone else, you have zero control over what they may charge. This applies to friends, family, and definitely your own children. The bottom line is that it’s irrelevant who charges the actual card. You are still ultimately responsible for any charges, unless it’s fraud. Refrain from lending your card out to someone unless you’re willing to pay off any debt incurred.
Letting Your Card Get “Charged-Off”
A charge off is one of the worst things that can happen to your credit report and score. What is a charge-off? This occurs when your card is so delinquent that it gets sold to a debt collector for mere pennies on the dollar. This charge-off will remain on your credit report for seven years and will be extremely costly for future credit situations and rates. Charge-offs take six months (typically) of missed payments. Bring delinquent accounts current before this point to avoid having this follow you for several years.
Waiting to Report Your Lost or Stolen Card
The longer amount of time that you wait before notifying your lender, the more time the thief has to charge up your card. Since you want to avoid being held responsible for any fraudulent charges, prompt notification is paramount.
Paying Your Bill Manually
Even the most diligent of bill payers can find themselves in a situation of a missed payment. The best course of action is to set your bill on autopay. This can easily be done online and tied directly to your bank. Be certain that you have enough cash in your account for this to happen. That’s why it’s even more important to track your expenses to know how much you can charge to pay it off at the end of the statement period.
Not Maximizing Your Credit Card Rewards
Most all of your credit cards come with some sort of rewards. Cash back, mileage, gifts, etc. You should be milking this for all it’s worth. You should be taking advantage of these without overspending. If you’re comfortable with owning several cards, you could even get more out of the cards. For example, you could use your Discover It card solely for its five percent BONUS CATEGORIES, that rotate quarterly. You could then use additional expenses on a card that earns miles for certain purchases. A personal friend of mine runs a very helpful YouTube page specifically for these tips. Please check it out. https://www.youtube.com/channel/UCvhkE6mhsYxdUXNjmJdtq_Q
Paying a Credit Card Convenience Fee
Are you paying for a bill (rent, medical, college, etc.) that tacks on a fee just to use the card? In most cases, the fee is not worth it. This is especially true if the charge isn’t as much as you’d earn in rewards (ie: cash back). There may be some instances where it’s worth it. For example, if you pay your taxes through Pay1040.com, the fee is only 1.87% of your payment. If you have a card that offers 2% cash back, then it may be worth it.
Having a Credit Card at All
I am a big proponent of using credit cards, but only if you can pay them off monthly and can use them responsibly. However, if you’re prone to overspending and have a hard time staying on budget, a credit card can be more of a hindrance than a good idea. It might be better to instead choose a prepaid debit card to guarantee that you stay within your spending limit.
Credit cards can be a good addition to your financial health in building your credit, but they can also be a huge pitfall if you make mistakes and don’t use them wisely. I hope that you’re not making the above mistakes in your daily financial life. And it’s never too late to stop doing them now.
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