by Maurie Backman | Dec. 16, 2019
Steer clear of these to stay out of debt.
When used correctly, credit cards can be a solid financial tool. Not only can they help you boost your credit score, but they can also give you rewards for things you're already buying, which is basically free money in one form or another.
The problem with credit cards, however, is that they're easily -- and frequently -- mismanaged. The result? Piles of costly debt, wrecked credit, and a whole lot of stress. If you'd rather avoid that fate in the coming year, here are a few key mistakes to stay away from.
Paying your credit card bill late is problematic for a couple of reasons. First, each time it happens, you'll be slapped with a late fee that costs you money. Secondly, a single late payment could be enough to drive down your credit score, thereby making it more difficult for you to borrow money the next time you need to.
To avoid being late with your credit card bills, set a calendar reminder so that you're alerted ahead of their due dates. At the same time, keep your spending to a reasonable level so that you're not forced to pay late due to a lack of funds. And if you can't pay your entire credit card bill in full, at least make your minimum payment. You'll still have to pay interest on your balance, but at least it will count as a timely payment, which means your credit score won't take a hit.
If there's a month when you have a bunch of unplanned expenses to deal with, you may find yourself in a scenario where you can only afford to make your minimum credit card payments. And while that's certainly not ideal, carrying a small balance for a month or two isn't the end of the world.
Things get more problematic, however, when you regularly only pay your minimum, and let your remaining balance build. Doing so can not only cost you loads of money in interest, but it can also harm your credit score. That's because your utilization, or the extent to which you use your available credit, needs to remain at 30% or below to avoid a hit to your credit score. This means that if your total credit limit is $5,000, you shouldn't carry more than a $1,500 balance. But if you only make your minimum payments, your balance will keep growing and you risk you landing in that unwanted situation.
The solution? Once again, it boils down to charging smartly -- namely, pledging to only put expenses on your credit card that you can actually afford to pay off when your bill comes due.
You never know when your credit card number might fall into the wrong hands. It's easy enough for a hacker or criminal to sneak a couple of modest charges onto your card without your being any the wiser -- that is, unless you make a point to read your monthly statements line by line. If you go through your statements and notice charges that weren't yours, you can dispute them with your credit card company to not only get out of paying them, but also potentially prevent your card from being used illegally again. In most cases, you'll be issued a new card once fraudulent charges are discovered on your account to prevent a repeat occurrence.
Ideally, you shouldn't be carrying a balance on your credit card. But if you're already in that boat, and you're paying a fortune in interest, you're doing yourself a major disservice if you don't contact your credit card company and ask for a lower interest rate. Remember, there's always the option to refinance your debt or transfer an existing balance onto a new card with a lower interest rate, but before you do, it's worth making a quick phone call and seeing what your credit card company will do for you.
Along these lines, it never hurts to ask for an increase in your credit limit -- provided you trust yourself not to abuse it. Doing so could help out on the utilization front, thereby improving your credit score.
Say you're carrying a $2,000 balance on a $5,000 credit limit. That's 40% utilization -- not ideal. But if you get your credit limit raised to $7,000, you'll be back in favorable territory.
If you have an old credit card sitting around, you may be tempted to close out that account rather than have another piece of plastic taking up space in your wallet. But before you do, consider this: Length of credit history is another key factor that goes into calculating your credit score. That means long-standing accounts can actually boost your score, while closing them can have a negative impact. Therefore, don't be so quick to close out old accounts. The only reason not to retain them is if you're paying an annual fee on a card you never use.
The savvier you are with your credit cards in 2020, the less likely you'll be to hurt your finances and land in debt. Make every effort to avoid these credit card mistakes -- you'll be thankful for it come 2021.
As long as you pay them off each month, credit cards are a no-brainer for savvy Americans. They protect against fraud far better than debit cards, help raise your credit score, and can put hundreds (or thousands!) of dollars in rewards back in your pocket each year.
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