Updated: 8/2/2012 12:57 PM ET|
The 7 deadly credit card sins
Carrying plastic leaves you susceptible to a host of temptations and mistakes that can bring regrets. Savvy cardholders know to resist them.
Credit cards can be a great asset or a great liability, depending on how a cardholder uses them. While you probably won't go to hell for committing any of these sins, the financial situation you will find yourself in afterward can certainly cause some pain to your pocketbook and damage your credit score. Here are the seven deadly credit mistakes you should avoid at all costs:
1. Gluttony: Bumping up against your credit limit
Just because your issuer awarded you a $6,000 credit limit doesn't mean you should max out the card. For starters, those who aren't able to pay off their balances in full every month increase the likelihood of winding up in debt, since they'll be subject to interest on their balances. Secondly, bumping up against your credit limit is likely to have a negative overall impact on your credit score.
"The closer you get to your credit limit, the riskier your credit profile is going to look," says Chris Mettler, the founder of CompareCards.com. Approaching your limit leads to a high credit-to-debt utilization ratio. Mettler says it's best to use credit in moderation, using only 15% or less of your total credit at any given time. And yes, you should also pay off all those balances in full by the end of the month whenever possible.
2. Pride: Not checking your credit report
You might assume your credit score is in fine standing based on a presumably stellar payment history, but the truth of the matter is that credit reports can easily contain errors. And the more egregious ones, like inaccurate delinquencies or improper credit limit information, can cost you more than a few points on your credit scores.
You should check your credit report at least once a year -- especially since you're entitled to one free copy a year, thanks to the Fair Credit Reporting Act -- or right before you apply for a big loan, to minimize the chances that you'll encounter any surprises.
3. Lust: Applying for too much credit
Lucrative sign-up bonuses can certainly be attractive, but that doesn't mean you should apply for every credit card that's touting one. Too many credit card inquiries -- generated by lenders checking to see if you deserve a new line of credit -- in a short period can also negatively affect your credit score. Instead, apply for credit as you need it, and add a new card to your payment arsenal about once a year until you have three or four you can consistently pay off on time at your disposal.
4. Greed: Taking out a cash advance
It may seem like a great idea to use your credit card to get a cash advance at a casino so you have some fun money to gamble with, but in addition to the lousy odds you'll have trying to make it grow, the paper comes with a price.
"You're going to be charged a significant amount of interest," Mettler says, estimating that most cash advances carry an interest rate around 23% or higher. It's best to use a credit card only when the plastic itself can be used to make the purchase and you can pay back the funds by the subsequent bill's due date.
5. Envy: Applying for a card that's out of your league
Your globe-trotting friend may continually flash a credit card that grants access to swanky airport lounges, earns free airfare and avoids foreign transaction fees, but don't let jealousy lead you to sign up for one of your own. Typically, cards of that caliber contain high annual fees that are worth paying only if you travel enough to justify the rewards.
Instead, ask yourself a few questions to figure out what type of credit card is more suitable to your lifestyle. (You'll also want to check that your credit scores qualify you for the account so you don't rack up any of the unnecessary inquiries we talk about in No. 3 above.) There may be a great rewards card with no annual fee that will look much better with your name on it.
- Compare: Find a better credit card
6. Wrath: Closing all your credit card accounts
If you've gotten burned by plastic, you may be inclined to cut up all the credit cards in your wallet and close all the accompanying accounts, but it's best to curb your anger. Closing accounts can negatively influence your credit-to-debt ratio, especially if the one card you're leaving open -- or transferring a balance to -- is bumping up against its credit limit.
It's better to keep accounts open but not use them, which will keep your credit-to-debt ratio positively intact and not jeopardize the average age of your credit report.
7. Sloth: Not checking your monthly credit card statements
It's easy to set up automatic bill pay on your account and then forget all about your credit card, especially in instances where you use it infrequently. But it's a bad idea to skip checking your monthly credit card statements.
"You can be paying for things you've signed up for and forgotten about," Mettler says. There's also the threat of fraudulent charges appearing, courtesy of errors or, even worse, identity theft.
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After a recent divorce, where credit-card woes and debt played a significant role, I ended up with having to take responsibility for the humongous outstanding balance on my ex's 4 credit cards.
Ex had run them to the max and had several times forgotten to pay, so the interest rate on them was a criminal 29.99%. Quick off the cuff calculation taught me that it would take 35 years to pay off with what I could (even barely) afford after child-support and maintenance to ex.
I'd paying this off from inside my proverbial wooden sleeping bag.
Once I knew that, I demanded to have the cards and clipped them, but left the accounts open.
Then I refinanced at a lower interest rate unsecured loan (Yes, at a credit-union. They gave me the best deal.) and bought down the interest rate with my loyalty/rewards points, shaving another 1.5% APR off the already attractive interest rate with a fixed duration of 36 months.
I then projected out three debt retirement budgets and strategies: aggressive, moderate and lax, threw out the lax scenario and settled on a strategy between aggressive and moderate.
Then, I created a buffer amount in my savings account which automatically deducts from my checking account, so I never see that money and I make sure that it is a little bit more than my monthly loan-payment. That way it would also accrue and earn some interest. Not much, but every little bit helps.
The loan is automatically paid out of my savings-account and if all goes well, is paid off in less than the term. (About 31 months), so in under three years, I will be done with it. The cards will still be open, but with entirely paid-off balances, so that they will reflect positively on my credit-report.
I use only one for rewards points and make sure that that balance is paid off every month (automatic, so that I do not have to worry about overlooking payments.).
The credit-card companies most likely will see me as a socalled 'Dead-Beat' customer, but I for one, have absolutely no problems with that.
Credit cards are a threat to the Galactic Empire!!!
Yes, and I also used to fly all obver this globe for about 75 K a year, and rent cars and hotels, but unlike some here thinking it is all for free, they are living in la-la-land.
Yes, you may "get points" on a card and get a few free items pending on your actual spending, but they do that for the reason of the ones who do not pay off every month, and that is by far the majority, so then they got you, and get 10-25 % later, so if you think the free hotel you got is free, you are once again living a dream-- I knew several of my employees who paid 5- 10,000 a year in interest!
And I write about 1-3 checks a month- never use credit card for bills-I have no bills, one would be stupid to retire with any debt!, especially if you make no money to deduct any deductable interest from.
We were once deep in cc debt - $28-32k. It took 15 years to pay it off, but I did it. I only followed one rule - pay your bills on time, even if you borrow from one cc to another. I started getting all the great cc offers, because paying on time is a major yes. When a financial magazine said you were ahead of the game if your cc interest was at 14%, all my credit was at 9.9% UNTIL PAID OFF. Later I got an offer for 4.9% until paid off. Finally, the last 3 years I had 0% for one year (3 separate cards). The 0% was only good for one year and then went to normal. So each year I transferred my charges to another card.
For the last 10 years I have used 2 cc's. I charge everything I can on them and pay them off each month. In that time I have not paid a dime to them and they have paid me close to $5k. I'm 75 and intend to go out that way. And yes, they do call people who pay off monthly, deadbeats.
The human weaknesses of Gluttony, Pride, Lust, Greed, and Envy are at the core of virtually all advertisements by credit card firms while the propensity for sloth is where they truly profit. The whole concept of "You need Credit" and that a good Credit rating is a necessity is designed to insure the bottom line of the bankers. If you can not afford it, don't buy it.
I bank with a CU $25.00 balance in a savings to have an account. $0 balance for a checking, $0 carge for checking account. Also overdraft protection so there is no $25.00 or more bounced check fee only $5.00 fee and money is taken out of your savings account (amount has to be above the $25.00 balance kept in the account.) Charge card interest has been 13.92% for at least the last 15 years it hasn't increased. if you have a platimum card your rate is even less, below 10% $0 debit card usage fee.
Oh yeah I read those papers that come with the credit card statements and if you don't agree with their terms your card is CANCELLED!!! Sounds like BLACKMAIL to me.
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