Nos for Credit Card: 9 Bad Habits to Break in 2022

Nos for Credit Card: 9 Bad Habits to Break in 2022 ...

There are several reasons why you might want to sign up for a new credit card, either to earnrewards, build your credit, or decrease on travel points and rewards. However, even with the ease a credit card provides, there are also risks to consider.

If you pay a card late or do not pay your balance in full, you may incur additional interest charges that would make your purchases more costly in the long run, particularly considering today''s interest rates, fueled by rising inflation. You might also lose your credit score, which might make it difficult to buy a house or get a loan.

What are the biggest mistakes well-meaning people make with their credit cards, and what can you do to avoid financial pitfalls? I spoke with experts for their suggestions, and I identified some of the most harmful credit card behaviors.

Learn how to avoid credit card debt and why it is now the time to pay off your credit cards.

Paying your credit card bill late

In a phone conversation, Colleen McCreary, a consumer financial advocate at Credit Karma, says this is the most common mistake people make with credit cards. Your credit history is a major factor in your credit rating and accounts for more than 30% of your overall score.

A late payment is a one-way ticket to ruining your credit, and the stress on your report wont last until seven years. Even worse, your creditor might sell your debt to a collection agency, which might boost your credit rating.

The best way to avoid late fees is to set a monthly reminder to pay your bill and at least make the minimum payment. Most credit card companies will also allow you to set up monthly auto-payments, so you wont skip a beat. Remember you can always set it to pay out the minimum, the full balance, and a specified amount.

Experian, a credit bureau, notes that some credit card issuers may allow for a short time to pay late, while others will notify your payment late as soon as you lose your due date.

If you pay your credit card bill promptly and accidentally miss one payment, call your bank as soon as possible to see if it will offer one-time forgiveness, provided that you pay in full at the time of your call. However, your bank may refund your late fee and interest, although it isnt required to do anything.

According to Equifax, some credit reporting companies may mark your payment late after one day, but those late payments are not reported to credit bureaus for 30 days. If you act quickly to change your issuers decision to mark your payment late, you may avoid damaging your credit score. If youre not able to pay your bill, you may also ask your issuer if it may offer a payment plan.

Stop paying your credit card amount late.

Maxing out your credit cards

The second important factor in determining your credit score is the percentage of available credit that you are currently using. This factor is described as the credit utilization ratio, which allows you to divide the amount you currently owe by your total credit limit or your maximum borrowing potential.

Maintaining a good balance on your credit card compared to your total credit limit will increase your total percentage of credit used and cause damage to your credit score.

For example, you should keep your credit utilization ratio down to 30% for a good credit score, although less is better. A good rule of thumb is to use 10% of your total credit limit and pay it off each month so youre not carrying a balance. If your credit limit is $5,000, you wouldnt want to borrow more than $1,500 and ideally $500 or less.

If your credit card limit is too low, you may even ask your credit card issuer for an increase.

If you cannot pay off the total by the payment deadline, doubling your outstanding balance (the amount of money you owe) will increase interest rates, which will significantly increase the likelihood of falling out of debt.

Making only the minimum payment on your credit card

Your minimum payment is the lowest amount that your credit card issuer will allow you to pay toward your credit card bill for any given month, for example, $50. The minimum monthly payment is determined by your credit card balance (what you owe at the end of the pay period) and your interest rate. It is usually calculated as either 2 to 4% of your balance, a lump fee, or the higher amount between the two.

According to Katie Bossler, a GreenPath financial wellness expert, making only minimal payments is one of the most common credit card mistakes.

Although making minimum payments on time is still much better than paying late or neglecting your debt, paying only the minimum might increase interest rates, making it much more difficult to pay off your balance completely.

If you pay off your debt for a year, you''ll pay $180 per month, and you''ll pay $161 per interest.

The income owes to the APR at a relatively high but not unreasonable rate of 25%, and a minimum payment of $50 would take 87 months (or a little more than seven years) to repay a $2,000 debt, with a significant $2,344 in interest payments. Moreover, increasing monthly payments to the same $180 would pay you debt in 13 months, and only $281.

Here''s an example of how spending more than minimum payments can save you significant amount of money in interest.

Credit card balance Annual percentage rate Monthly payment Time needed to pay balance Additional interest paid
$2,000 14.55% $50 4.7 years $753
$2,000 14.55% $180 1 year $161
$2,000 25% $50 7.3 years $2,344
$2,000 25% $180 1.1 years $281

The best way to avoid paying interest at all on your credit cards is to pay off your full balance each month. If you cant do that, Bossler, the quality expert from GreenPath financial advisors, suggests using the credit card while youre paying it off, and paying more than the minimum to do so.

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Taking out a cash advance on your credit card

The most expensive way to pay for things is by withdrawing a cash advance with a credit card, according to Bossler. Cash advances are a way of borrowing money from your credit line to put money in your pocket right now.

As convenient as it may be, a cash advance is offering a interest rate that is typically significantly higher than your typical APR. Most cards will also pay a transaction fee of 3 to 5%. This is not the case, according to Bossler.

If you receive a convenience check from a credit card company, make sure you include it in the mail. It''s possible that an extra amount of cash is used in the recycle bin. It''s best to start a side hustle or taking out a personal loan with a lower interest rate. Also, check out budgeting apps so you can avoid long-term expenses.

Chasing credit card rewards with abandon

Consider your lifestyle when it comes to purchasing a new credit card account. Heavy travelers should select a card with frequent flyer rewards. Look for cash back rewards for groceries and grocery stores.

Although rewards should not be used as a strategy for buying things, Bossler said. Many cards will require a minimum amount of purchases for special rewards, or a welcome bonus to persuade you to spend more than you can afford.

Credit cards with lucrative rewards may charge higher annual fees, for example, $100 or even $500 per year. If you do not spend enough to pay back that annual fee, consider a card with no annual fee.

Although credit card rewards can be beneficial when used wisely, you must be cautious to avoid losing your balance. Thomas Nitzsche, the former head of media and brand at MMI, claims that often people make the mistake of using credit cards for rewards while ignoring increasing interest on their balance. Consider developing a strategy to pay your balance down instead.

When you cancel your credit cards, your credit score may drop.

During a 0% APR period, not paying off significant purchases

Whether you just opened a 0% APR credit card that offers interest-free debt for a specific promotional period or a balance transfer card, make sure you read the fine print. Oftentimes, theres a fee to transfer your existing balance, typically between six and 18 months. That means you have a limited period to pay off your balance before a higher APR kicks in. (When it does, your monthly interest becomes a lot more expensive.)

The amount you owe will be divided by the number of months in your 0% APR promo period. Then pay that amount monthly to completely pay off your balance while you are borrowing without interest. For example, if you purchase a $300 television using a credit card with 0% APR for six months, making $50 monthly payments will eliminate your debt before the no-interest period expires.

Using a 0% intro APR credit card may be a good strategy to pay off your debt or finance a large purchase, but it may also be risky. Nitzche reports that many people who transfer their credit card balances only make minimal payments, resulting in increased debt and increased credit errors. This leads to a point where they can no longer get approval for new accounts.

Canceling your credit cards

You should cancel your account even if you paid down your balance on a credit card. Both things are important to your credit score. (Remember, your credit utilization ratio is the percentage of your total credit lines across all cards you are using.)

Your total available credit line shrinks once you close an account you''ve failed to utilize, making your credit utilization ratio higher.

The addition of older credit cards will prolong your credit history, leading to a significant decline in your credit score. It is best to leave the oldest account open as well as the one with the highest credit limit to maintain your credit utilization ratio and prevent any damage to your credit score.

It is important to note that with interruption, credit card issuers may automatically close your account. To avoid this, Nitzche advises that it is best to use each of your credit cards once in a while for small purchases.

Applying for too many credit cards

It''s possible that you''ve heard this advice before: Never apply for too many credit cards at once. Every time you apply for a new credit card, your credit score can drop somewhat due to a tough credit check.

Soft credit checks are required for your consent and involve a full credit summary from a credit bureau. These are not intended to affect your credit score. They are used for preapproved credit cards.

Your credit history will be reduced by a small amount of points by a hard pull. While it will stay on your report for two years, the deduction to your score will normally be eliminated within a year.

Too many hard pulls on your credit in a short amount of time, for example, applying for five store credit cards in one weekend might impact your credit rating more, as multiple inquiries indicate higher risk of insolvency or bankruptcy. Experian suggests deciding between applying for new credit methods to avoid lowering your credit score.

You may lose credit scores by applying for too many credit cards at once.

Not keeping your billing statements updated regularly

How often do you check your monthly billing statement? It can be an eye opener to see how much money you really charge your credit card, particularly if it is routinely more than you bring home each month.

While spending $20 here and there may not seem like a massive amount, it may also add up quickly. Remember that increasing your credit utilization ratio (your percentage of credit used) will lower your credit score and high balances will cost you more in interest. How do you know how much you have charged if you aren''t monitoring your spending?

The only reason to keep an eye on your credit card finances is because you should thoroughly review your transactions to ensure there are no potentially fraudulent charges you did not pay. The sooner you discover youre a victim of identity fraud, the sooner you may contact your card issuer to dispute charges and take the necessary steps to secure your credit card account.

Learn three methods to get the most out of your credit card, as well as how to choose the appropriate credit card.

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