The credit card industry is booming, with Americans racking up an estimated $900 billion in revolving debt as of April 2015. While that’s less than the $916 billion consumers boasted in 2009, it appears that consumers won’t be putting away the plastic any time soon.
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When used wisely, credit cards can help you to save money and improve your credit score, which is vital for snagging the best interest rates and helping you qualify for loans. On the other hand, buying things with credit can spell financial disaster if you’re not careful. Even a seemingly minor slip-up can cost you big so it pays to know what credit card mistakes to avoid.
1. Paying Late or Not at All
When you’re not keeping track of your bills, it’s easy to let something fall through the cracks. You may think that paying your credit card late or skipping a payment altogether isn’t that big of a deal but you could be seriously damaging your credit score when you don’t pay on time.
Many lenders use your FICO® score when determining whether or not to extend you credit. Approximately 35 percent of your FICO® score is based on your payment history. Every time you pay late or skip a payment, it shows up on your credit which can drag your score down. If you go too long without paying you could end up in default, which means the debt collectors will soon come knocking.
Setting up a system for keeping track of your due dates is an easy way to cut down on late payments. Taking advantage of mobile banking, automatic bill payments and budgeting apps can help you stay on top of what needs to be paid and when.
2. Maxing Out Your Cards
Another factor that goes into your credit score calculation is your total credit utilization ratio. Simply put, this means the amount of credit card debt you have compared to your total credit line. Generally, lenders prefer you to be utilizing 30 percent or less of your total available credit.
Maxing out your cards can also hurt your credit score. Next to your payment history, the total amount you owe accounts for another 30 percent of your FICO® score. If you’re at or close to your credit limits on multiple cards it sends the signal that you may have trouble keeping up with your payments in the future.
3. Paying Just the Minimums
Part of the allure of using a credit card to pay for things stems from the minimum payment trap. Paying $25 or $30 a month to cover the minimum seems manageable enough so you continue using the card. As your balance begins to creep up, you notice that your monthly payments are also increasing. Before you know it, you’ve piled up a heap of debt and you can’t afford the minimum payment anymore.
Paying just the minimum is a good way to ensure that you remain in credit card debt, especially if you continue charging things to the card. Depending on how deep your debt hole is, it may take you years to climb out and cost you thousands of dollars in interest in the meantime.
Thanks to the 2009 CARD Act, card issuers are now required to include information on your statement showing just how long it’ll take you to pay off your balance if you’re only paying just the minimums. If you haven’t taken the time to crunch the numbers, you may be in for a shock the next time you open your credit card bill.
4. Taking Cash Advances
When you’re short on money, taking a cash advance from your credit card can be a temporary fix. While an advance allows you to cover the gap when you run into trouble, borrowing against your credit line typically comes at a high cost.
Not only will you have to pay interest on the transaction but you’ll also have to shell out a fee. Depending on the card, the interest rate for advances may be as much as 5 percentage points higher and the fee could add up to $50 or more. When you add up how much a cash advance actually costs, you have to consider whether the convenience is really worth it.
5. Chasing Rewards
Rewards credit cards allow you to earn cash back or points on the things you buy. Certain rewards cards are geared towards travel while others offer bonuses when you use the card for everyday purchases. While these cards come with certain perks, you have to be careful to avoid credit card missteps while you use them.
If you’re only using a credit card for the purpose of earning rewards, you need to be able to pay the balance off in full each month. Otherwise, the amount of money you’re paying towards interest will eat up any savings you get from your rewards. Also, if there is an annual fee, do the math to determine if you are still saving when you compare the rewards you get to that fee.
Credit cards can be a blessing or a curse, depending on how you use them. If you don’t tread carefully, you could be playing with fire when it comes to your credit score and your finances. Paying your bills on time, keeping your balances low and avoiding hefty fees can keep you from getting burned by credit card missteps.
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