8/8/2012 8:10 PM ET|
11 common credit card mistakes
Steering clear of these missteps will help you limit costly charges, avoid unnecessary fees and improve your credit score.
Whether due to confusion or carelessness, credit card mistakes are all too common. The fallout can be costly, no matter what the cause. Even a single slip-up can result in higher interest rates, lower credit limits, unwanted fees or dings to a credit score.
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.
Here are 11 of the most common credit card mistakes and how to avoid making them:
Paying bills late
Late payments are the "biggest foul" when it comes to credit cards, warns Ben Woolsey, the director of marketing and consumer research at CreditCards.com. The consequences can include late fees, jacked-up interest rates and lower credit scores.
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 payment that's 30 days late 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.
Bungling balance transfers
Moving debt from a high-interest-rate card to one with a low introductory rate can make financial sense -- but only if you read the fine print. If you ignore or misunderstand balance-transfer rules, you could end up owing even more.
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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 from 3% to 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.
Making minimum payments
Most of us know that we should pay more than the monthly minimum on a credit card bill, but it's easy to put that extra $50 toward dinner or shopping instead. After all, what difference would a few bucks a month make? The answer: a huge difference.
If you have a balance of $5,000 with an APR of 14%, and you pay only 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 making only minimum payments, as well as how much you would need to pay to erase your debt in three years.
Using up all available credit
No matter how many cards you hold, keep an eye on your credit utilization ratio, or the proportion of your total available credit you use each month. You may want to apply for another card if you are using up a big chunk of your available credit. In general, Kiplinger recommends spending no more than 30% of your revolving credit card limits.
The total amount of your available credit that you access can have a big impact on your credit scores. 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 have only 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.
More from Kiplinger's Personal Finance magazine:
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It's time to ask ourselves what exactly a credit report is and precisely it serves consumers. I've learned so much during these horribly difficult times for so many - and little has to do with any "traditional" advice. For example, ALL information submitted to credit agencies under a social security number ( correct or incorrect by a digit maybe?) or name is simply placed on the individual's (who seems a closest match) is entered by date entry folks - no research, no certaintly, no proof, no checks and balances. It is the individual's legal responsibility to check for, find, and correct errors. I know in the U.S. this posture makes us feel like John Adams for a day, but anyone who has ever been a customer anywhere knows this is impossible to fathom. Banks, retailers, service shops, restaurants are always through error (no fault of their own, of course), negligent training, or fraud "making mistakes" with customer information and service.
Does anyone else remember when the credit rating formula was a huge secret? Basically, we accepted as one of those elevated mathematical thoughts beyond all Americans. Once it was "outed" (thank you Internet !), a new formula was immediately required.
When will MSN Money tackle issues of these types rather than propogating the same old, same old with the not-so-new twist "it's all the customer's responsibility?"
Ha ha ha ha...slip up? What, are we in kindergarten? For those that can't manage their failures, ahem, slip ups, evil companies (who, by the way, weren't so evil when you were seeking credit - were they?) can see you coming from a mile away.
It's simple, really, if you carry a card, make it a no annual fee card and actually pay it off every month. The rest all becomes background noise. No hassles and no worries. Follow this rule and the title of this piece might change from 'common' credit card mistakes to 'hard-to-believe' credit card mistakes.
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