In the spirit of the 4th of July weekend, a gentle reminder that credit cards are a bit like fireworks: they’re a good time when used correctly, but dangerous if the proper precautions aren’t taken. not taken.
“Card users generally fall into two camps,” says Brian Walsh, financial planner at SoFi. “There are people who have a balance and struggle to manage their spending. And there are those who have a plan, pay off their entire balance every month.”
If you fall into the first camp, be careful. Overspending on your credit card could lead to debt that accumulates at a high interest rate and ultimately hurts your creditworthiness in the eyes of lenders. If you fall into the second camp, using one or more credit cards can be a great way to earn rewards and cashback for spending you would otherwise.
In short: “Credit cards can offer a lot of value, but also a ton of inconvenience that can slow you down financially for a long time,” says Walsh.
To maximize your chances of using your credit to your advantage — and to avoid weakening your credit score — avoid these three common credit mistakes, experts say.
Mistake 1: Missing Your Payment Date
The goal of any credit card is to pay off the entire balance on time each month. Yet even the most diligent and punctual card users are subject to the occasional misfire, such as if their payment date falls on a busy workday followed by a happy hour that migrates to a second and third location. (to cite a totally random example).
The second your payment is late, your credit card company can usually charge you a late fee, currently up to $30 for your first late payment and $41 for subsequent late payment within 6 billing cycles. Let things go a little longer, and things get worse. If you don’t pay for 30 days, your overdue will show up on your credit report.
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The simple solution: Set up automatic payments on your credit card to make sure you never miss a deadline. But it takes work, warns Ted Rossman, senior industry analyst at Bankrate. Autopay “isn’t always great when it comes to credit cards,” he says. Since the amount you pay can vary significantly from month to month, “you’ll need to be very careful with the fees to make sure you’re not overspending.”
To ease this pressure you might feel by setting up autopay for your entire balance each month, experts recommend using autopay to cover the minimum payment. “That way you guarantee you won’t miss your payment. You can sort of set that as a floor for yourself,” Rossman told Grow. “Then you can log in manually and pay the full amount.”
Mistake 2: Searching for rewards while managing a balance
If used correctly, credit card rewards can be a huge financial boon, especially in an environment where rising commodity prices are eating away at family budgets. Revenue A 6% cash back on groceries or a 4% cash back on dining or takeout can help offset rising food costs, for example.
But if you manage a balance while earning these rewards, you may fall behind. “You don’t want to chase 5% cash back if you’re paying 17%, 20%, or even 25% ‘interest,’ Rossman told Grow. “It’s easy to get upside down there. -above.”
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Once you’ve fallen behind, you might feel like earning rewards for spending helps you catch up. But it could end up putting you further down the hole, Walsh points out. “Research shows that subconsciously you’re willing to spend more on a credit card because it’s less painful,” he says. “And if you’re paying off credit card debt, tracking your debt repayment becomes so difficult because you’re also spending on the card. It’s much harder to see your progress.”
If you find yourself with a balance on one or more cards, there are many methods offered by experts to help you pay off your debt quickly so that you no longer accrue interest. But no matter how you decide to pay, it would be wise to do your spending while waiting on something other than your card. “If you have a balance, you shouldn’t be spending on your credit card, period,” says Walsh. “You should use debit or cash.”
Error 3: Close old maps
OK, you’ve established good spending habits, established a great track record, and built a credit score good enough to qualify for a great rewards card. When is it time to close that starter card you used to build your credit?
“From a credit scoring perspective, the correct answer would be, well, never,” Rossman says. “With some caveats.”
The reason experts generally recommend avoiding canceling old cards comes down to how credit scores work. An important factor in determining your score is your credit utilization rate – roughly, the percentage of available credit that you actually use. Generally, the lower your usage, the better.
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In an example provided by Rossman, consider a credit user with two cards, each with a credit limit of $5,000. On one card the user has a balance of $3,000 and on the other a balance of $0, which means that he uses $3,000 of his available credit of $10,000, for a ratio of 30%. . “If you cancel a card, you’re now using $3,000 out of $5,000 for 60%,” he says. “This is where canceling one of these cards can hit you right away.”
Rossman points out that if the card you’re considering canceling has a much lower credit limit than your new card, you’re less likely to see a big drop in score. The same goes for people who keep their usage very low in general. But for the most part, it’s best not to cancel old cards.
Instead, says Rossman, “Call the company and ask if you can switch to one of their other cards. If they can switch you to another card, it won’t affect your credit score in any way. And since this is not a new request, there will be no serious investigation.”
If there’s no other card within the same family that looks appealing, just put the card you don’t want to keep using on the back burner, suggests Walsh. “Assuming there’s no annual fee, you might just want to leave it open,” he says. “Set it to autopay and use it to pay something small like your streaming service bill each month.”
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