Whether due to confusion or carelessness, credit card mistakes
are all too common. The fallout can be costly, no matter what the cause. Even a
single slip-up can result in higher interest rates, lower credit limits,
unwanted fees or dings to a credit score.
New rules put in place by the Credit CARD Act of 2009 and
the Dodd-Frank Act of 2010 help,
as does the formation of the Consumer Financial Protection Bureau,
which monitors the credit card industry. But ultimately it's up to you to use
credit wisely.
Here are 11 of the most common credit card mistakes and how to
avoid making them:
Paying bills late
Late payments are the "biggest foul" when it comes to
credit cards, warns Ben Woolsey, the director of marketing and consumer research
at CreditCards.com. The consequences can include late fees, jacked-up interest
rates and lower credit scores.
Take Chase Bank's Sapphire card, for example, which has a
current annual percentage rate of 13.24%. If you make a late payment, the APR
could jump to 29.99%. Plus, you'll be hit with a late fee of up to $35. If you
miss two or more consecutive payment dates, the late fee can soar to 3% of the
outstanding balance.
Late payments, especially those more than 30 days overdue, can
hurt your credit score. Payment history accounts for 35% of a FICO score, the
most common credit score, which ranges from 300 to 850. A single payment that's
30 days late can drop your score by 60 to 110 points, according to
CreditCards.com.
The lesson: Pay your bills on time, every time. The CARD Act
requires banks to mail your statement at least 21 days before the due date.
Mark your calendar, and allow enough time for postal delivery. Or better yet,
pay bills online.
Bungling balance transfers
Moving debt from a high-interest-rate card to one with a low
introductory rate can make financial sense -- but only if you read the fine
print. If you ignore or misunderstand balance-transfer rules, you could end up
owing even more.
Start by determining exactly how long the introductory offer
lasts. Then ask yourself whether you have the discipline and means to pay off
the debt before the APR goes up. Otherwise, you could find yourself eventually
paying a higher interest rate.
Next, check whether an introductory offer entails a transfer
fee. "Very few cards offer a truly free transfer anymore," says
Woolsey. Fees, which don't have a cap, currently range from 3% to 5% of the
amount transferred.
Even with a fee, a balance transfer can be beneficial. Let's say
you move $5,000 from a credit card charging 14% interest to a card with a 0%
APR for 12 months and a 4% fee. The transfer fee would add up to $200. In
contrast, paying a fixed rate of $120 a month on your old card would cost you
about $650 in interest over those same 12 months.
Making minimum payments
Most of us know that we should pay more than the monthly minimum
on a credit card bill, but it's easy to put that extra $50 toward dinner or
shopping instead. After all, what difference would a few bucks a month make?
The answer: a huge difference.
If you have a balance of $5,000 with an APR of 14%, and you pay
only the minimum of $100, it will take 22 years to pay off the debt in full,
according to a Federal Reserve credit card calculator. You'll also hand over
$6,110 in interest. Boost your monthly payment to $150, however, and you'll be
debt-free in four years and pay $1,369 in interest.
Thanks to the CARD Act, you don't have to do the math yourself.
Your monthly statement now includes information on how long it will take to pay
off your balance by making only minimum payments, as well as how much you would
need to pay to erase your debt in three years.
Using up all available credit
No matter how many cards you hold, keep an eye on your credit
utilization ratio, or the proportion of your total available credit you use
each month. You may want to apply for another card if you are using up a big
chunk of your available credit. In general, Kiplinger recommends spending no
more than 30% of your revolving credit card limits.
The total amount of your available credit that you access can
have a big impact on your credit scores. While new credit determines 10% of
your FICO score, amounts owed determines 30%.
For example, if you have two cards, each with a $1,000 limit,
you have $2,000 in total available credit. That means you can charge $600
between the two cards, while still keeping your credit utilization ratio at
30%. If you spend that same amount but have only one credit card with a $1,000
limit, then you will have used 60% of your available credit.
Be sure to use all of your cards periodically. If a card is
inactive for a long period, the lender may close the account. That could result
in an unexpected jump in your credit utilization ratio, which could drag down
your credit rating.
Ignoring monthly statements
This may be the easiest pitfall to avoid. As soon as you receive
your monthly credit card statement, take a few minutes to look it over.
Mistakes happen, so be sure there are no erroneous charges. The sudden
appearance of unfamiliar charges can also signal identity theft. Call your
lender immediately to report discrepancies.
Reading your bill can also help you understand how long it will
take to pay off your debt. As mentioned earlier, the length of time required to
retire your balance by making minimum payments is displayed, as is how much you
would need to pay each month in order to pay off your balance in three years.
These numbers could act as a wake-up call for you to increase your monthly
payments.
Also, pay attention to the various interest rates you pay on
purchases, cash advances and other charges. Look for changes from the previous
month. Lenders are now required to give 45 days' notice before hiking rates.
And it never hurts to double-check the due date of your bill to avoid late
fees.
Racking up foreign transaction fees
There's no surer way to ruin a trip abroad than coming home to a
credit card statement chock full of foreign transaction fees.
Most bank-issued credit cards tack on these fees, which often run as high as
3%, including the 1% that Visa and MasterCard charge on foreign transactions.
It is possible to dodge some foreign transaction fees. Capital
One, for example, waives the fee completely. Other issuers waive foreign
transaction fees for certain cards, including Citibank's ThankYou Premier card,
PenFed's Premium Travel Rewards American Express card and Chase Bank's Sapphire
card.
Because foreign transaction fees vary by credit card, it pays to
contact each issuer to find the one that charges the lowest fee. Use that card
for purchases while abroad. Note: Many banks also charge for foreign debit
transactions and ATM withdrawals, so check on those fees, too.
Taking cash advances
Unless it is an emergency, do not use your credit card to get a
cash advance. If you do, you'll incur sky-high interest charges and probably
pay an upfront fee for the privilege. Adding insult to injury, there's no grace
period before interest starts accruing.
For example, if you take out $1,000 with your Citibank Platinum
Select credit card, you will be hit with a $50 fee. The APR, which starts being
tallied immediately, will be 25.24%, five percentage points more than the
highest rate for purchases. Even if you pay back the advance within one month,
you will owe $21 in interest on top of the $50 fee.
The longer you take to repay a cash advance, the worse the blow
to your wallet. Wait a year to pay off that $1,000, and you will owe more than
$250 in interest on top of the original $50 fee. If at all possible, explore
other ways to get extra cash before resorting to a cash advance.
Spending to earn rewards
It's easy to get sucked in by credit cards that offer
"free" rewards, such as cash back or airline tickets. But
"free" rewards aren't free. To earn rewards, you need to spend money,
and the promise of rewards can lead you to spend more than you otherwise would
-- and perhaps more than you can afford.
In general, any reward you earn on a credit card will be worth
1% of the amount you spent to qualify for the reward. In comparison, the
average APR right now is about 14%. "Rewards never offset interest
charges, unless you're in a promotional period," says Woolsey.
Pay careful attention to the fine print on cash-back promises.
Credit cards that tout 5% cash back on purchases "almost always"
operate on a tiered-spending structure, warns Woolsey. People who charge little
every month might fall into the lowest tier, meaning they might earn just 1%
cash back. You'll need to spend much more, and keep spending much more, to
qualify for the full 5%.
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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