7 Credit Card Mistakes

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Banks spend millions in advertising urging you and other consumers to apply for and use credit cards. Used improperly, credit cards can bury you in debt and trash your credit score. These seven rules can prevent you from making common credit card mistakes.

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7 Common Credit Card Mistakes & How to Avoid Making Them

The average American consumer has two credit cards, according to the Federal Reserve. Not surprisingly, credit card debt is the No. 2 consumer debt in 2014. Here are seven tips to help you avoid common mistakes people often make with their credit cards.

1) Pretending Credit Card Money Isn’t Real

Several studies show that people who use a credit card spend more than when they carry cash. McDonalds, for example, expects that franchises implementing credit card processing for the first time will see a 40% increase in average transaction amount. Credit card spending, for many people, is not as real as cash.

Therefore, create rules for your credit card use. For example, use your card only for:

  • Emergencies, such as car repairs or medical needs.
  • Big, planned expenses, such as new appliances. Some cards add extended warranties if purchased with those cards.
  • Limited, recurring expenses, such as gasoline.

Other rules might be making a point of leaving your credit card at home if you are destined for a store or mall where you have not been able to resist spending in the past. Everyone has a uncontrollable spending weak spot — know yours.

2) Using a Credit Card as a Substitute For Income

If your credit card account balances are growing, then you may be using your credit cards to live beynd your means. The more your balances grow, the easier it is to get sucked into the minimum payment trap, where you service your debt, but never pay it off. 

The problem is the high cost of keeping a big balance on your accounts. According the Federal Reserve, the average credit card interest rate in 2013 is almost 13%. To put that in perspective, a $1,000 borrowed for 5 years at 13% costs almost $400 in interest.

If you're over-using your credit card and keeping high balances, you need to buckle-down with a household budget and get your expenses under control.

3) Falling into the Minimum Payments Habit

Most credit card issuers require you to pay 2% to 4% of your account balance each month. As we show in our minimum payments calculator, making a minimum payment is an expensive trap to fall into. The cheapest use of a credit card is to pay-off the balance each month. If you cannot repay the entire balance on your credit card today, then use the Bills.com minimum payments calculator to see how much you can save by paying more than the minimum.

4) Making Late Payments

Making a late payment, or missing a payment will hurt you four ways:

  1. Late Fees: Penalties include flat, one-time fees and sky-high penalty interest rates. These can be very expensive and make your initial purchases turn out to be very expensive.
  2. Credit Score Damage: Timely payments are the most important factor in boosting your credit score. Conversely, late payments on your credit cards result in a negative marks on your credit report, and can drag down your credit score.
  3. Reduced Available Balance or Cancelled Account: Some banks reserve the right to cut your available balance or cancel your account if you fail to make payments in a timely manner.
  4. Risk of Lawsuit: Continued late payments can turn into a charge-off, collection item, and in some cases, lawsuits. A lawsuit can result in wage garnishment, account levy, liens, and in some states, a sheriff removing your personal property.

5) Taking Cash Advances

Most credit cards allow you to take a cash advance. This is almost always a bad idea because banks tack on fees for advances. These may be flat fees of $10 or $20, or 2% to 4% of the amount advanced. Also, it's typical for advances to have a higher interest rate than other transactions.

6) Maxing-Out Your Account Balance

Using up all of your available balance harms you three ways:

  1. Credit Score Damage: We mentioned that timely payments are the biggest factor in your credit score. The second-biggest factor is how much debt you have compared to the total available credit on your accounts. If all of your accounts are maxed out, you will be considered a poor credit risk, because it appears that you are struggling to pay off the debt you have already have.
  2. Loss of Reserve: If you max-out your cards and a disaster occurs, you won't have a cushion to fall back on.
  3. Loss of Flexibility: If you have a maxed-out account and apply for a new credit card, your application will either be denied, or approved with a sky-high interest rate.

7) Closing an Old Account

You might be tempted to close an account you have not used in a while. Before you do, stop and consider these two facts:

  1. Age Matters to Your Credit Score: The third most important factor in your credit score is the length of your credit history. It is a big credit myth that closing an old account in goods standing harms your score. You  will get credit for that old account for years to come, even after it is closed.
  2. Available Credit Matters: The danger in closinga an account is that it harms your credit utilization. Your credit utilization is calculated two ways. The first is your utilization for each account. The second is your overall utilization. if you close an old account the credit limit for that account no longer counts towards your total available credit. If you carry balances on other accoutns, reducing your available credit could harm your score.

The lesson here is clear: unless an unused account is costing you in annual fees, it's probably a good idea to leave the account open.

Bills Action Plan
Recognize these seven mistakes before they become habits, and your credit card will become a useful personal finance tool and not a problem with which you need to deal.
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