Slide Show | August 2011
11 Credit Card Mistakes to Avoid
By Amanda Lilly
Follow @AmandaMLilly
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.
Take a look at 11 of the most common credit card mistakes and learn how to avoid making them.
Slide Show
11 Credit Card Mistakes to Avoid
Paying Bills Late
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 30-days-late payment 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. Paying Bills Late
Slide Show
11 Credit Card Mistakes to Avoid
Bungling Balance Transfers
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 between 3% and 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. Bungling Balance Transfers
Slide Show
11 Credit Card Mistakes to Avoid
Making Minimum Payments
If you have a balance of $5,000 with an APR of 14%, and you only pay 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 only making minimum payments, as well as how much you would need to pay to erase your debt in three years. Making Minimum Payments
Slide Show
11 Credit Card Mistakes to Avoid
Using Up All Available Credit
The total amount of your available credit that you access can have a big impact on your credit score. 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 only have 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. Using Up All Available Credit
Slide Show
11 Credit Card Mistakes to Avoid
Ignoring Monthly Statements
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 such. 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. Ignoring Monthly Statements
Slide Show
11 Credit Card Mistakes to Avoid
Racking Up Foreign Transaction Fees
It is possible to dodge some foreign transaction fees. Capitol One, for example, waives the fee completely. Other issuers waive foreign transaction fees for certain cards, such as 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.
SEE ALSO: How to Avoid Credit Card Problems When Traveling Racking Up Foreign Transaction Fees
Slide Show
11 Credit Card Mistakes to Avoid
Taking Cash Advances
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. Taking Cash Advances
Slide Show
11 Credit Card Mistakes to Avoid
Spending to Earn Rewards
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%. Spending to Earn Rewards
Slide Show
11 Credit Card Mistakes to Avoid
Paying Excessive Annual Fees
The latter 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 a matter of choice. If premium services are worth the price tag to you, then by all means pay for the privilege. But if it is rewards points you’re after, be sure the value of the reward surpasses the annual fee every year.
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 this annual charge, just ask. Banks now are required to tell you. Paying Excessive Annual Fees
Slide Show
11 Credit Card Mistakes to Avoid
Chasing Teaser Rates
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, whiles others shorten the promotional period.
Weigh the impact of repeatedly tapping promotional offers on your credit score. Too many open lines of credit, as well as too many recently opened accounts, can lower your score. 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. Chasing Teaser Rates
Slide Show
11 Credit Card Mistakes to Avoid
Neglecting Credit Scores
A FICO score is the most common credit score, although there are others such as VantageScore.
Five major factors go into a FICO score: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%) and types of credit used (10%). All it takes is a poor showing in one of these categories and your score can drop.
Let’s say you have a long credit history and always pay your bills on time, but you typically spend 90% of your available credit limit. That percentage, or credit utilization ratio, can drag down the “amounts owed” portion of your FICO score because it signals to lenders that you’re a risky borrower. Use closer to 30% of your available credit and you can raise your score because you’re telling lenders you have your spending under control.
If you are denied credit or charged a higher interest rate due to your credit score, lenders now are required to provide you with a copy of your score at no cost. You should also request a free copy of your credit report every 12 months at AnnualCreditReport.com. Report any errors to the appropriate credit-reporting agencies.
SEE ALSO: How to Get Your Credit Score for Free Neglecting Credit Scores
