Credit cards are an excellent financial tool, allowing us flexibility in our spending, the ability to earn rewards on the things we buy, and even help up build our credit reports. But not everyone knows how to properly manage one (or a wallet full of them). Could your credit card habits actually be harming your finances or, ironically, your credit score?
Let’s look at five common “bad habits” that are seen in the world of credit cards, and how you can eliminate them to make 2018 your most card-savvy year yet.
Running Up Credit Utilizations
One common misconception about credit cards is a high credit utilization on one card isn’t so bad, as long as you don’t carry too much debt overall. Unfortunately, this isn’t entirely the case.
As you likely know, your credit score is calculated in part by your credit-to-debt ratio, also called your credit utilization. This percentage signifies how much credit you’ve been given by companies, compared to how much of that you’ve utilized in charges. For example, if you have one credit card with a $10,000 limit and a $2,000 balance, you have a 20% utilization. Ideally, you want to keep this utilization below 30-35% overall, in order to improve your creditworthiness and score.
But what if your credit card debt is unevenly dispersed among your credit cards? Can that have a more negative effect? The answer is yes.
Let’s say that you have two credit cards in your wallet. One has a $3,000 limit but great cash back rewards. The other has a $7,000 limit, but doesn’t offer cash back or points. As a result, you put most of your spending on the former card.
One month, you spend $2,000, which you don’t pay off right away. Your overall utilization is still 20%, which is great – $10,000 in total credit versus $2,000 in debt held. However, your utilization for that first card is a significant 66.6% ($2,000 out of the allowed $3,000 line of credit). Even though your overall percentage is well below the desired limit, you might still see your credit score dinged.
That’s because some credit scoring models could penalize you for exceeding a 30% utilization on any particular card. Even if you have available credit on other accounts, this one card will raise red flags… and your aggregate utilization.
To avoid this issue, it’s smart to spread your debt across cards to keep your utilization low. Even smarter is to pay off your credit cards in full each month; if that’s not possible, though, try to disperse it in a way that keeps your overall and individual utilizations below 30-35 percent.
Borrowing from Peter to Pay Paul
Using available credit to pay off other debts is not only a dangerous game, but a pricey one.
If managed responsibly, you can take advantage of introductory 0% APR balance transfer offers to pay off other debts. Doing so can allow you to pay down balances faster, for less money, and with a renewed focus (since the offer expires after a number of months).
However, it’s easy to get in trouble with these, especially if you’re trying to pay off debts with lower interest rates, like personal or auto loans. Paying these balances off with 0% interest sounds great, but if you come to the end of the introductory period and haven’t paid the balance in full, the debt will now be subject to your credit card’s interest rate. The current average is about 16%, but can go all the way up to 30% (or more) for some cards!
A move from 8% to 0% is great, if you are positive that you can pay off the debt in time. However, if there’s a chance that you won’t clear the balance, avoid doing the transfer at all. You’ll be kicking yourself when you’re suddenly paying 24% interest on a debt that used to charge a third of that.
Not Earning Rewards
Credit card companies are becoming more and more competitive, attempting to lure new customers in with excellent benefits and rewards. There are more cash back credit cards on the market today than ever before, and there’s no reason not to be using one.
If you are spending on a non-rewards credit card – either for big purchases or just your daily spending – you’re missing out. Some cards can earn you as much as 6 or 7 percent back for every dollar spent in a particular category, just for buying the things that you would have bought anyway.
As long as you have developed responsible credit card habits and will pay off that balance monthly, you should absolutely consider applying for (and using) a cash back card. You’d be shocked to see how much you can earn in a year’s time!
It’s incredibly easy to spend more than you should with a credit card. You don’t see the money leave your bank account right away, and in some ways, it can almost feel like “play money” as you swipe your plastic at the register. But this is an easy way to get into trouble.
Even if you’re spending on a credit card throughout the month, it’s imperative to still set – and stick to – your budget. This may mean using a tool like Mint or Personal Capital to manage your purchases, or even just setting account alerts. These notifications can let you know when you’ve made purchases above a certain limit or when your balance reaches a set level.
It’s more of a challenge to spend wisely with credit cards, but certainly possible if you give your budget regular attention. Track your spending, even when using a credit card for purchases, and keep yourself on track.
Paying Unnecessary Annual Fees
Annual fees are irritating, but often come along with the most beneficial credit card products. Thus, they’re usually a necessary part of the game.
Sometimes, though, they are unwarranted and a waste of money. Determining which kind of annual fee you’re being charged is the difference between paying for access to an excellent credit product and wasting money each year.
The general rule of thumb for annual fees is to determine whether you break even (or better) in the end. Maybe your annual fee is $99, but you earned $380 in cash back last year – in this case, it’s worth keeping. Some of the biggest annual fees come from cards with incredible rewards – The Platinum Card from American Express, for instance, brings with it a steep $550 fee every 12 months, but also offers a $200 airline credit, $200 in Uber credits, $100 toward Global Entry/Pre-Check enrollment, free checked bags, earned points, a sign-up bonus, and more.
Even the highest fees can be worth the expense. If a card doesn’t really warrant its fee but you don’t want to close it out, try calling and asking to have the fee waived. The worst they can say is no!
Perform an Inventory
In order to make the most of your credit cards in 2018, it’s time to take a look at your current habits. If you’re paying fees for cards that don’t warrant them, missing out on benefits, failing to balance your spending, or making risky transfers, you could be setting yourself up for a year of wasted money and frustration.
Take a look at what’s in your wallet and perform a credit card inventory. With some planning and smart financial moves, you can make 2018 your most successful year of finances yet.