Credit cards can be beneficial tools when used responsibly, but they can wreak havoc on your credit score and financial health when used the wrong way. Unfortunately, it’s easy to find yourself on a slippery slope with credit cards, but it’s not too late to turn it 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
Making a late payment can have serious consequences. For starters, you could incur late fees up to $35 and a potential interest rate hike. If your payment is more than 30 days late, the major credit bureaus—Equifax, Experian and TransUnion—could add a late payment mark to your credit report that could remain there for seven years. This can impact 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 it’s a lack of funds that 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 due on your credit card payment is kind of like kicking the can down the road. Technically, you are making some progress, but you’re not really accomplishing much in the long run.
Similarly, if you’re just paying your 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 you’re using, 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 over, you’ll be surprised how quickly that little bit extra can add up.
Use Bankrate’s credit card payoff calculator to play with the numbers and see how quickly you can pay off your credit card.
3. Taking out cash advances
Getting a cash advance is fast and easy, but chances are it’s 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.
And 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
One reason credit cards appeal to consumers is because of the rewards and perks they offer, like cash back on purchases and air travel miles. While taking advantage of credit card rewards is a popular and potentially lucrative strategy, mismatching cards with your spending patterns or not making use of your cards’ rewards means you could effectively be leaving money on the table.
For example, you probably don’t want to use a rotating bonus category card like the Discover it® Cash Back as your everyday grocery card. That’s because you’d only earn the maximum 5 percent cash back for groceries 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. For everyday groceries, you’d be better off with the Blue Cash Preferred® Card from American Express, which earns an unparalleled 6 percent cash back on groceries up to $6,000 per year, then 1 percent cash back after that.
Here’s another example: If you don’t travel or dine out regularly, it probably doesn’t make sense to shell out a $550 annual fee for the Chase Sapphire Reserve, or $250 for the American Express® Gold Card, since both cards’ rewards skew heavily towards travel and dining, two of the most popular bonus categories for rewards cards. 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.
Rewards cards are a fantastic way to get benefits for charging purchases you would’ve made anyway. Be mindful not to overuse the card just for points or miles, though, and practice good habits with your rewards card.
5. Closing older credit card accounts
Many people believe that closing an unused credit card will improve their credit. However, the length of your credit history 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. 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. It all depends on the scoring model, 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 score 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 down altogether.
6. Not repaying the balance during a 0% promotional APR offer
A 0 percent APR credit card for an introductory period gives you immediate access to funds and the potential to use it interest-free, so long as you pay off your balance before the introductory period expires. Unfortunately, that’s where it goes wrong for many people.
If you don’t pay off the balance before the end of the promotional period, often up to 18 months on the best cards and sometimes more, the card’s regular interest rate—the current average APR for cards is north of 16 percent—kicks in. This new rate will apply to new purchases and any unpaid balance remaining after the introductory period.
A smart plan for repaying balances for intro APR cards is to calculate a monthly payment that results in the full repayment of the debt before the promotional period expires. Say you have $1,500 of debt on your card and an introductory interest rate of 0 percent for 15 months. If you make sure you pay at least $100 each month for the duration of the intro offer, you’ll pay off your balance before accruing any interest.
7. Perpetually transferring debt to new balance transfer cards
Balance transfer credit cards offering a promotional 0 percent APR provide an excellent way to pay off high-interest credit card debt. And, 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 are frequently opening new credit cards and only making the minimum payment, you’re not paying down your debt. What’s more, you’re probably racking 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 paying down your debt.
Rather than risk a potentially endless cycle of credit card payments, you might want to consider getting a personal loan instead. Credit requirements are often 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 things you can’t afford
It is way too easy to shop without making a plan to pay it off before the end of a billing cycle, and precisely how you get into debt. But, to avoid taking on unnecessary debt because you went on a shopping spree, create a budget for yourself so you are aware of what you can and cannot afford. Before you decide to make a large purchase, assess whether or not you can afford it. If the answer is no, you should wait until your finances are in order.
Keep in mind: You should always pay your bills before you pay yourself.
The bottom line
There are a lot of advantages to using credit cards wisely and being aware of the pitfalls above will help you make smart choices when managing your credit cards. 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. But it’s important to avoid getting stuck making the same credit card mistakes over and over.