Who’s controlling whom?
Love them or hate them, there are a few solid reasons why you should have a credit card in your payment arsenal.
“Having credit cards is smart if (they’re) used properly related to building a good credit score,” says Christopher Viale, board chairman of the Association of Independent Consumer Credit Counseling Agencies.
And savvy spenders use credit cards to leverage rewards programs and earn points, miles or cash back on their purchases.
But making a credit card your payment method of choice could easily backfire. “The pitfalls of using credit cards not just for the purpose of building your credit profile obviously involves the temptation for overspending,” Viale says, which could ultimately drive you into debt and damage your credit score.
Here are five signs you’re using your credit cards wrong and that credit is controlling you.
You struggle to make payments
The first rule of credit cards is to pay your monthly bill on time, since missing payments wreaks havoc on your credit score. A first missed payment, for instance, can cause your VantageScore to drop 70 to 90 points, depending on your current score.
“If you’re only able to make the minimum payments and you have trouble making the minimum payment, that’s a warning sign,” says Christina Povenmire, a CFP professional with CMP Financial Planning.
Those struggling to pay their bills on time may want to put their credit cards on ice for a while.
“Stop using (the card), start paying with cash and then from there, figure out a plan to start paying that debt down,” says Katie Moore, financial counselor at GreenPath Debt Solutions’ Detroit branch.
If you’re revolving balances on multiple credit cards, focus on paying off the card that carries the highest annual percentage rate first. “Make minimum payments on the lower-rate cards,” Povenmire says, since those will accrue less interest.
Bankrate’s debt payoff calculator can also prove helpful in reducing your credit card debt.
You spend for rewards
The ability to earn rewards on purchases is a big perk when it comes to credit card spending, but you shouldn’t be running up a bill just to rack up points, miles or cash back.
That type of spending “can easily get out of control,” Moore says. “You never want to charge more than you can pay off by the end of the month,” she says, since the interest on those purchases will negate the points that you’ve earned.
Similarly, you don’t want to spend just to earn special deals or discounts from retailers, who often partner with issuers in online shopping portals or offer incentives to get customers to open a store card.
“That incentive isn’t much of an incentive when it does damage to your budget,” says Bruce McClary, manager of government relations and public policy at ClearPoint Credit Counseling Solutions. “The offer has to come at a time when you’re also ready to make that purchase.”
To determine whether you’re disciplined about credit card spending, Moore suggests writing down all of your purchases for a short period of time, at least once a year.
“The only way you know for sure is if you’re tracking your expenses,” she says.
You stick with a subpar product
Solid credit scores — driven, of course, by smart spending habits — entitle consumers to competitive loan terms and conditions, so consider it a red flag if you’re stuck with a card that carries interest rates around 18 percent or 20 percent, says Povenmire.
“There are lower-rate credit cards available,” she says. If you’ve been using credit steadily and you can’t qualify for one of them, “that’s simply a sign you’re in over your head.”
Other customers may cling to a subpar payment method “because of brand loyalty to the card issuer,” McClary says. “They’re just in a comfortable place with the product and that keeps them from looking around for a better deal.”
But customers with stellar credit scores shouldn’t be beholden to a card that doesn’t offer the rates and rewards they deserve.
“You can have your cake and eat it, too, but you may have to go to a different restaurant,” McClary says.
Just be sure to do your research ahead of time. Too many inquiries can affect your credit score, so you’ll want to find out which card offers the best terms and conditions before filling out an application. You’ll also want to carefully consider whether your old card is worth keeping since closing it, too, can ding you score.
“Pull a copy of your own credit report to see where you stand before you shop around,” he adds.
You have more cards than you need
Consider it a red flag if, thanks to attractive sign-on bonuses and lucrative rewards programs, you start applying for more credit cards than can fit in your wallet. An overabundance of plastic could lead to big problems down the line.
For starters, the more credit available to you, the easier it is to overspend. Additionally, “it gets confusing to keep up with the payments,” Viale says, and you could wind up inadvertently missing one.
To prevent these and other problems, try to limit the number of cards in your wallet.
“We suggest carrying two credit cards that have good rewards points for your type of spending and obviously a debit card,” Viale says. The payment methods you choose should also have practical credit limits — “around three to five months of your normal monthly household spending,” he adds.
This sweet spot will help you keep your spending and your credit utilization rate in check. Many experts suggest keeping this rate — essentially the amount of debt you are carrying versus how much credit has actually been extended to you — below 20 percent.
You use your card as a status symbol
Certain luxury credit cards are designed specifically to get people’s attention. Issuers, for instance, will use flashy colors and materials heavier than plastic to give their products a plunk factor.
But “if you’re using a credit card as a status symbol, then you really have some issues you need to address,” McClary says. These types of luxury cards often have high annual fees attached to them. They also typically have ultrahigh or even unlimited credit limits, which can spell disaster for the average customer.
“You want to get a card with a credit limit that is manageable,” he says. “On cards that have no credit limit or have much higher credit limits than you can afford, in a worst-case scenario, you would go bust.”
If you know deep down that you can’t really afford to keep a certain card in your wallet, “shop around or move to another product that’s issued by the same creditor,” McClary says. While closing out the card entirely could negatively affect your credit score, there are times when that might be the right call.
“It’s better to suffer through that for a little while than continue to waste money on the annual fee,” he adds, or wind up with balances you ultimately can’t afford.