12/21/2012 6:30 PM ET|
4 costly credit card missteps
Card come-ons and other credit temptations can seem like great ideas at the time, but you have to be careful to make them work in your favor.
Credit cards can be great tools for earning money back on purchases, scoring merchant discounts and qualifying for added benefits in many product categories. But plastic lovers must always remember to tread carefully.
When leveraged incorrectly, some spending strategies can easily work against you and your wallet. The trouble starts when you stop looking at the big picture.
"Strategies go off the rails or fail when people only look at the short-term benefits," says Bruce McClary, a spokesman for ClearPoint Credit Counseling Solutions in Richmond, Va. "You need to look out on the horizon to determine if it is truly worth it."
You also need to ignore flashy marketing campaigns and focus instead on the fine print.
"Reading the terms and conditions is key," so you adequately understand the payment method you are using, says Laura Creamer, a financial education specialist with nonprofit credit counseling organization CredAbility in Atlanta.
To spare you some missteps, here are four credit card strategies that can easily work against you, as well as tips on how to keep them from backfiring:
Opening a card just to get a sign-up bonus
Sky-high sign-up bonuses have become a popular way for issuers to woo new cardholders. But many consumers don't realize these bonuses are often attached to spending thresholds, McClary says. This means you'll earn the bonus points, miles or cash back only after ringing up a target amount of purchases on your credit card.
For example, one card company is running a promotion on a card that awards cardholders 25,000 bonus points after the first purchase. Others require much larger purchases to obtain bonus points.
"A lot of credit card companies are making rewards harder to get," Creamer says.
McClary says you don't want to alter your spending habits to chase rewards points. If a bonus requires $3,000 in charges within the first three months of opening an account and you normally wouldn't spend that much, forgo the bonus points, he advises.
Fee avoidance can cost you
Big sign-up bonuses are often attached to credit cards with higher annual fees. As an added incentive to get you to apply, issuers typically waive these fees for the first year. But it's not a good idea to try to game the system by opening the account just to get the bonus, then closing it before the annual fee cycle starts. This strategy can actually damage to your credit scores.
"You're affecting the length of your credit history," so an account that's been open fewer than 12 months will drive down the average age of all the credit lines on your credit report. That average age is one of the components of your credit scores, CredAbility's Creamer says. Your scores suffer another way, too; every credit card application generates a credit inquiry, and these can cost you three to five points each.
More from Bankrate.com:
VIDEO ON MSN MONEY
How to keep Americans in debt to the bank...thats credit for ya.
No thanks to credit cards!!
I was shopping for a home and initially my credit score was 759. After several inquiries as to the
amount I could qualify for my credit score dropped over forty points. So the author is off his
rocker. Now I am paying down my credit cards more so I can qualify for better home.
yes my score went down over forty points after only three or four inquiries. Only reason is the
bank tried for a higher amount and would not go with that amount they told me my credit
was good but debt ratio to bill was a little to high so they tried a lower amount for price of a
home. At first the cu told me I could qualify for x amount using my income to debt but later
changed their minds so they inputed a lower price for home and still came back no. I think the
reason may be that I am in my sixties which should not matter. I always pay all bills on time.
never late. I have lived 8 years in the place Im in and never late with rent not even one day.
Over forty points with four inquiries that sucks and the credit bureaus suck.
1) Credit is some giant myth invented by Satan himself to keep mankind enslaved to corporations.
2) I had a billion dollars in credit card debt but now have zero debt because I worked hard and scrimped and saved - now I won't touch them at all as I've seen the light. I buy my cars with cash.
3) I'm unemployed and can't pay my bills and my kids eat styrofoam because I'm so poor - yet I will never file for bankruptcy because people online tell me it's evil so instead I work 47 jobs to further enrich Wall Street while I slip further behind.
Does that cover everything?
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.