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A credit card is a great asset, but when you use it incorrectly it can cost you a pretty penny. Carry a balance and pay high interest rate charges. Miss a payment and incur a late fee. Close a credit card and ding your credit score. The costs add up quickly.
But it's not hard to get into the habit of using your credit card correctly. And as a result, you can save money while building credit and maybe even take advantage of some sweet perks along the way.
One of the biggest credit score myths is that carrying a balance on your credit card improves your credit. In fact, 22% of Americans carried a balance thinking it would increase their credit score.
In reality, carrying a balance month-to-month hurts your credit score and costs you money. If you carry a balance, you'll have a higher credit utilization rate, which is the amount of debt you have compared to your available credit. Experts agree that the lower your utilization rate, the better. A FICO study found "high achievers" — consumers with an average 800 FICO score — on average use a mere 7% of their credit limit.
Carrying a balance can also get expensive thanks to interest charges. And while a cash-back card can be a great tool to help you save money on your everyday spending, all that savings is for nothing if you're paying interest.
While you should always make at least the minimum payments, it's not advised to only pay the minimum due. Not paying your bill in full can lead you to fall into debt and rack up unnecessary interest charges. Plus, just paying the minimum can add months — even years — to the time it takes you to pay off debt.
Have a payment plan in place before you take on bigger expenses, and always make consistent, on-time payments toward your balance.
Late or missed payments can seriously hurt your credit score if you're more than 30 days past due. You can expect a drop of 17 to 83 points for a 30-day missed payment and a 27 to 133 decrease for a 90-day missed payment, according to FICO data.
However, if your payment is less than 30 days late, you won't see a drop in your credit score since a payment has to be a full 30 days past due before it's reported to the credit bureaus (Experian, Equifax and TransUnion). But you may incur a late fee or penalty interest rate — which raises your APR.
Set up autopay to ensure payments are always made on time. And if autopay isn't for you, set calendar reminders and email notifications.
It's important to check that the transactions listed on your bill are accurate so you can take early action against fraudsters or reporting errors. At the very least, you should review your monthly statement for errors. But it's a good idea to check your transactions a few times each week to verify everything looks OK.
You should be proactive about reviewing the charges that appear on your account so you can potentially spot fraud early and resolve any incorrect charges.
When you apply and are approved for a credit card, you receive a long cardmember agreement that probably doesn't top your must-read list. However, it's important you parse through the jargon and review important account terms, so you understand all the applicable fees.
Here are some key terms to look out for and what they mean:
- Annual fee: The yearly fee charged for holding a card.
- Purchase APR: The annual percentage rate is the yearly interest rate purchases are charged when you carry a balance month-to-month. Simply divide by 12 to get the monthly interest rate.
- Balance transfer APR: Often the same as the purchase APR, this interest rate applies to balance transfers.
- Penalty APR: Card issuers may penalize you with an interest rate that's higher than your regular APR when you pay your balance late.
- Late payment fee: If you pay late, you'll incur a fee up to $29 for first-time instances and up to $40 for subsequent violations made within six billing cycles. Some cards waive this fee.
- Foreign transaction fee: Purchases made outside the U.S. often incur a fee, typically 3% per transaction.
- Balance-transfer fee: When you transfer debt, you'll often incur a 3% to 5% fee.
Perhaps one of the riskiest things to do with your credit card is to take out a cash advance. Interest starts accruing on the amount of cash you withdraw immediately — there's no grace period like regular purchases. And you'll likely incur a cash advance fee, which can be around 5% of the advance.
Many credit cards come with introductory 0% APR offers, where you won't be charged interest on new purchases, balance transfers, or both, for a set time frame. These offers can be a great way to pay for expenses over time without incurring interest charges. However, you should review the fine print associated with the offers to know exactly when the intro 0% APR period begins and ends, as well as the terms once the offer ends.
Using the majority, or all, of your available credit is never a good idea. Your utilization rate will be very high, which can lower your credit score. The amount of credit you use plays into your utilization rate, and, like we mentioned above, the lower your utilization the better.
If you find yourself frequently charging close to your limit each month, and you have no problem paying off your bill, then you can call the credit card company and ask for a credit increase.
Each time you apply for credit, a new inquiry appears on your credit report. The more inquiries in a short period of time, the greater risk you appear to lenders. Try to only apply for credit as needed, ideally not more than once every six months. Take advantage of pre-qualification forms, which allow you to check whether you may qualify for a card without damaging your credit. (Read how many credit cards should you have.)
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The average length of time you've had credit is one factor making up your credit score. When you close a credit card, the average length of your credit history is affected.
For example, if you have a card that's 5 years old and a card that's 2 years old, you've had credit an average of 3.5 years. If you close the 5-year-old card, your age of credit decreases to 2 years.
It's generally not advised to close a credit card, especially your oldest card. Although, there are times when it can make sense to close a credit card, such as when you're charged an annual fee that isn't outweighed by the card's benefits.
Here's how to cancel a credit card.