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Credit cards can be beneficial tools when used responsibly. However, they also have the potential to wreak havoc on your credit score and financial health when used the wrong way. If you find yourself on a slippery slope with credit cards, you can still turn things around by making smart choices and avoiding bad habits.
Here are eight bad credit card habits you should avoid if you want to make the most of your credit cards.
1. Making late payments
Late payments can have serious consequences. For starters, you could incur late fees up to $35 and a potential interest rate hike from your issuer. If your payment is more than 30 days late, you may receive a late payment mark on your credit report with the major credit bureaus — Equifax, Experian and TransUnion — that could remain there for seven years.
This can impact your ability to achieve or maintain good credit and, in turn, qualify for more credit or loans in the future.
If you often forget your due date, consider creating a reminder on your phone or setting up automatic payments. If a lack of funds is preventing you from making timely payments, you might request a new due date from your card issuer that aligns better with your pay schedule.
2. Paying only the minimum due
Paying only the minimum balance due on your credit card payment is kind of like kicking the can down the road.
If you’re just paying the minimum balance, you’re not progressing toward paying off your balance, and you’re likely paying more in interest than you want to. Not only that, paying only the minimum could negatively impact your credit by raising your credit utilization. Credit utilization is the percentage of your total credit used, and it makes up 30 percent of your FICO credit score. Experts commonly recommend keeping your credit utilization ratio between 10 percent and 30 percent to keep it from impacting your credit score.
Pay more than the minimum whenever you are able. The best practice is to pay your bill in full each month so you’re not carrying a balance. Putting as much as you can toward your monthly payment will reduce the balance you’ll carry over to the next month and result in lower interest charges. Even if it’s just a small amount more, you’ll be surprised how quickly that little bit extra can add up.
Use Bankrate’s credit card payoff calculator to help determine how quickly you can pay off your credit card.
3. Taking out cash advances
Getting a cash advance is fast and easy, but it’s often not worth the convenience. Many card issuers charge a higher interest rate for cash advances than for regular purchases. And unlike the grace period issuers offer for purchases (as long as you’re not carrying a balance), you won’t receive a grace period to pay back a cash advance. Interest for cash advances begins accruing immediately.
If all that wasn’t enough, you’ll likely be on the hook for a one-time cash advance fee, typically around 3 percent of the cash amount. That means if you get a cash advance for $400, you’ll be subject to a $12 fee for the privilege.
4. Using the wrong credit card
Rewards and perks, like cash back on purchases and air travel miles, are one of the biggest benefits of using credit cards. Rewards cards are a fantastic way to get benefits for charging purchases you would’ve made anyway. However, getting the best value from those rewards requires choosing a card that aligns with your spending patterns, so you’re not leaving money on the table.
For example, if you spend a majority of your monthly budget on groceries, you might pick a card like the Blue Cash Preferred® Card from American Express. It earns an unparalleled 6 percent cash back on groceries at U.S. supermarkets, up to $6,000 per year in purchases, then 1 percent cash back after that.
You probably don’t want to use a rotating bonus category card like the Discover it® Cash Back as your everyday grocery card, on the other hand. It earns 5 percent cash back after activation on rotating categories each quarter (up to $1,500 in purchases, then 1 percent) and 1 percent for all other purchases. You’d only earn the maximum cash back amount on groceries when grocery spending comes into the rotation, for three months of the year (typically January to March, depending on Discover’s cash back calendar). The rest of the year, you would only earn 1 percent cash back on grocery spending.
Here’s another example: The $550 annual fee Chase Sapphire Reserve®, or $250 American Express® Gold Card, can be a great value if you travel and dine out regularly, since both cards’ rewards skew heavily toward travel and dining. If those aren’t your top spending categories though, you may not earn enough to outpace the high annual fees. You’d likely be better off with a general purpose card with a flat rate for cash back, like the Wells Fargo Active Cash® Card, which offers unlimited 2 percent cash rewards on purchases and charges no annual fee.
Just be mindful not to overuse the card only for points or miles, though, 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, closing accounts can have a big effect on the length of your credit history. This factor makes up 15 percent of your credit score, and high credit score achievers tend to have long credit histories.
Closing an older account can have a negative impact by lowering the average age of your accounts. Put simply, say you’ve had one credit card for six years and another card for two years. The average age of your credit history would be four years. But if you closed the older card you’d be left with just a single two-year account, effectively dropping the age of your accounts to two years.
Closing a credit card or loan account could impact your credit score, but it might not have an immediate effect, depending on whether your score comes from VantageScore or FICO. VantageScore may not include closed accounts when it calculates 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 scoring calculations. Closing a credit account might not have an immediate effect on the length of your credit history since a closed account will stay on your report for seven to 10 years (depending on its standing when closed).
Think twice before closing an older credit card, especially your oldest one. Of course, it makes sense to cancel your credit card if it has a high annual fee that isn’t recouped by the card’s rewards, but it’s worth investigating other options, like a product switch or downgrade before shutting the account altogether.
6. Not repaying before a 0% APR offer ends
A 0 percent APR credit card gives you immediate access to your credit line, but does not start charging interest on your balances through the introductory period. That means you could potentially use your new card interest-free, so long as you pay off your balance before the introductory period expires. Otherwise, interest will kick in at the ongoing rate.
Some of the best 0 percent APR cards offer up to 21 months interest-free, but if you don’t pay off the balance before the end of the promotional period, you’ll pay interest on the remained. And with the current average APR for cards nearing 20 percent, that can quickly get expensive.
A smart plan for repaying balances for intro APR cards is to calculate the amount you’ll need to pay each month to repay in full before the promotional period expires. With a $1,500 balance, for example, and an introductory interest rate of 0 percent for 15 months, you’d need to pay at least $100 each month for the duration of the intro offer to avoid interest.
7. Perpetually transferring debt to new balance transfer cards
Balance transfer credit cards can be an excellent way to pay off high-interest credit card debt within an introductory 0 percent period. While we don’t always recommend transferring a balance multiple times, it may make sense if you’re following a disciplined debt reduction plan, and you know you won’t be debt-free before the first intro APR period ends. In that case, a second balance transfer would give you the opportunity to continue paying down your debt interest-free, saving you a lot of money in the process.
On the other hand, if you continuously open new credit cards and only make the minimum payment, you’re not going to make much progress in paying down your debt. Plus, you can rack up a lot of balance transfer fees along the way. It’s a mistake to keep moving debt from one credit card to another if you’re not making significant progress in your debt payoff.
Rather than risk a potentially endless cycle of credit card payments, you might want to consider getting a personal loan instead. Credit requirements can be more lenient with personal loans than with credit cards, and the interest rates are typically significantly lower. Sure, you’ll have to pay interest on an installment loan, but at least your installment loan will have a defined end date, so you’ll know exactly when you’ll be debt-free.
If you have a new balance transfer card or are considering getting one, Bankrate’s balance transfer calculator can help you determine the amount of time it will take to pay off your debt.
8. Buying more than you can afford
One of the best ways to use your credit card responsibly is by charging only what you know you can pay off.
It is way too easy to shop without making a plan to pay off your balance before the end of a billing cycle. It’s also precisely how you get into debt. But you can avoid taking on unnecessary debt by creating a budget for yourself; this will help you stay aware of what you can and cannot afford.
Before you decide to make a large purchase, assess whether or not you have the money to pay it in full. If the answer is no, you should wait until your finances are in order.
The bottom line
There are a lot of advantages to using credit cards wisely, as long as you can avoid the pitfalls and manage your spending. An occasional slip-up, like pulling out your gas card at the grocery store or only making a minimum payment one month, is not going to completely derail your financial life. What’s most important is to avoid getting stuck making the same credit card mistakes over and over.