Using Credit Cards Wisely
Mistakes to Avoid
It only takes a few slip-ups here and there to set you up for long-term credit card problems. Watch out for these common blunders:
- Maxing out a card. Carrying very high balances on your credit cards can negatively affect your credit score. Those cards also become difficult to manage and pay off. As interest accumulates on the balance, so does your debt burden.
- Paying only the minimum due. It may take you years—and lots of accrued interest and extra debt—to pay off a large balance if you only make the minimum payment.
- Making late payments. Pay something toward your bill even if it’s not the minimum amount. Companies can charge hefty penalty rates if you go more than 60 days without making any payment. Plus, your interest rate can skyrocket.
- Adding charges to a balance transfer card. Transferring debt from a high-interest credit card to one with lower or zero interest can be a smart move—as long as you don’t use the card for new purchases and add to your debt. Not only will you have more debt, but new charges often have a higher interest rate than that of the transferred balance. If you don’t pay off the full amount when your promotional deal ends, you’ll be paying a high interest rate on the balance transfer, as well as the new charges.
- Cashing credit card checks without reading the terms. A credit card check (defined by Bankrate.com), also called a convenience check, is linked to a user’s credit card account and can be used to make purchases. It might seem like a good idea to use a check issued by your credit card company to pay off debt or make a big purchase. Here is the catch: credit card companies sometimes consider these checks to be the same as taking out a cash advance, which means you’ll pay higher interest and fees. Before you use a credit card check, read the terms to make sure you understand what you’ll be charged and when.
- Overusing cash advances. Withdrawing $100 every now and then from your line of credit might not seem like a big deal. However, credit card companies often charge steep rates on cash advances, and that rate goes into effect the minute you have cash in hand.
- Forgetting about credit card benefits. Many credit card companies offer free price-matching services or extras like extended warranties, purchase protections and rental insurance. The key is to keep track of which cards you use for big purchases, like a computer or a refrigerator, so you can take advantage of this coverage should you need it.
The average American has three to four credit cards, according to a poll by Gallup in 2014. The right number of cards to have is debatable. Your credit utilization, or the ratio of how much you’ve charged on the cards compared to your credit limit, is more important. For instance, if you have $500 in charges on a card with a $5,000 credit limit, you’re using only 10% of your credit limit. This is good for your credit score. If you had $4,000 in charges on the card, you’d be using 80% of your available credit, which isn’t so good. Aim to keep your credit utilization ratio under 30%.
The number of credit accounts you have is considered when calculating your credit or FICO score. This includes credit cards, as well as mortgages, car loans and student loans. What are considered too many accounts varies from person to person and depends on your overall credit picture.
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