June 28th, 2017
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Credit Card Mistakes
Credit Card Mistakes
Between our tendency to overspend, especially on items we don't really need, and the high interest rates associated with credit cards, a volatile mix can ensue. In fact, according to statistics from the U.S. Federal Reserve, households with at least one credit card were found to hold, on average, more than $15,000 in revolving credit card debt.
The mistakes we as consumers can make regarding credit cards are numerous, and they're all nearly as important as the next. As a result, the list compiled below is in more of an order of occurrence, versus importance.
Credit card mistake #1: Not reading the fine print.
Do you know if you have a set APR, or if it is based on an introductory period of time? Do you understand what your APR will increase to should you make a late payment? Do you know if there any annual fees associated with your card, and if so, what these amounts are?
Once you obtain a new credit card, it's imperative that you thoroughly read through the contract, which will stipulate important details such as your current interest rate, future interest rates, fee schedules, and repayment options. A basic failure to understand the agreement you're entering into can have devastating financial consequences.
If you've already made the mistake of not reading the contract for an existing card, the good news is that most lenders have their user agreements available online. However, because each agreement can vary slightly depending on the details of your specific contract, the 2009 Credit CARD Act stipulates that all signed credit card user agreements were to be maintained by a lender, and are freely available to the public. This means you should be able to simply contact your credit card issuer for a copy of your specific user agreement.
Credit card mistake #3: Overspending.
As referenced above, nearly all American households are saddled with revolving credit card debt. While this can certainly be the result of unplanned emergencies such as car trouble or hospital visits, the sheer prevalence of this debt shows us that we are likely chronic over-spenders.
Most credit card professionals suggest not exceeding 30% of your available credit limit on any one card. It's also important to remember that your 30% of your FICO score is calculated by looking at your available credit limit in conjunction with your balance. This means that if you have one or more cards that have reached or exceeded their credit limit, your FICO score can be negatively impacted by up to 30%.
For example, if you have three credit cards, each with $2,000 limits, this means you can charge up to $1,800 ($6,000 x .3) between them without any negative impact on you credit score. However, once you exceed this number, it will begin etching away at your credit rating.
Credit card mistake #5: Not paying your bill on time.
The interest rate shown in your credit card agreement is often the best rate you will maintain, as long as all payments are received in a timely fashion, and you don't exceed your credit limit. However, with even one late payment, your interest rate can increase dramatically. In addition to an increased interest rate, you can also be assessed with late fees, which may range anywhere from a small one-time charge, up to two to three percent of your outstanding balance.
Also, any payments than are more than 30 days overdue are reported to the credit reporting agencies, which can ultimately decrease your FICO score, leading to further interest rate hikes on unrelated cards.
All credit card companies are required by law to send your account statement at least 21 days in advance, which means you should have more than enough time to pay it. In addition, if you don't want to take the time to write a check and send it through the mail, most credit card companies offer the availability of paying online.
Credit card mistake #6: Making only the minimum monthly payments.
When you receive your monthly credit card statement, two main pieces of information will be presented; your outstanding balance, and the minimum payment the issuer will accept. It's certainly tempting to pay only the minimum amount, and then use the extra money to have a night out on the town or to treat yourself to a shopping spree. Keep in mind though, that this behavior will cost you dearly in the long run.
For example, by using the Federal Reserve Credit Card Calculator, we can see that having a $10,000 balance with an annual percentage rate of 15% results in a $200 minimum monthly payment. However, we can also see that, by making only the minimum monthly payments, it will take 32 years to pay off the balance, and we will have paid more than $15,000 in interest. To put this in perspective, if you took out a 30-year mortgage at the same time you began repaying this credit card debt, you will be handed the deed to your home before repaying your credit card issuer.
Credit card mistake #7: Taking out cash advances.
Most credit card lenders will offer the availability for cardholders to withdraw cash from an ATM, essentially like a debit card linked to a bank account. Unlike a debit card though, you will be charged exorbitant interest rates on the money, in addition to high fees.
For example, if you withdraw cash from your credit card with an average 15% interest rate, you could see this increase anywhere from five to ten percent on the cash advance. Many lenders will also charge a fee ranging anywhere from $10 to $50 or more for the convenience of obtaining cash from your credit card. On top of all this, most credit card user agreements stipulate that lower interest balances are typically paid first, which means that any money paid to your card will be applied to the cash advance only after the balance from your regular purchases has been paid off.
Credit card mistake #7: Failing to monitor your credit rating:
Your FICO (Fair Isaac Corporation) score is a number ranging anywhere from 300 to 850, and is the first thing most lenders will review prior to agreeing to issue you a credit card, or when reviewing your account to determine if interest rates or credit limits should be increased. As a result, it's extraordinarily important that you know what your credit score is, and how you can keep the number as high as possible.
Your FICO is a mathematical formula that tells a lender how large or small a risk you present when it comes to repayment of a loan. The score consists of five groups; payment history makes up the largest portion at 35%, amounts owed at 30%, length of credit history at 15%, new credit at 10%, and types of credit used at 10%. Additional information about your score can be found at www.myfico.com