As consumers, we’ve never had more options when it comes to making a purchase than we do right now. Although not entirely mainstream yet, e-payments and digital wallets are only adding to our list of choices at the checkout line. But even with these new alternatives, Americans still reach first for our credit cards when making purchases.
With this continued reliance on plastic, it’s important to remember that a credit card is a tool — and, like any tool, there’s a right way and plenty of wrong ways to use them.
Even those of us who have used credit cards for decades could be making mistakes without knowing it. That’s because the credit card world is constantly evolving, and card issuers work hard to remain on the more profitable side of this transactional relationship. Even if you consider yourself a diligent user of plastic, you might be making mistakes you’re not aware of that could be affecting your credit report.
Here are some common but preventable mistakes many of us make with our credit cards, and how we can avoid these potentially costly blunders:
1. Making Unnecessary Purchases Just for the Reward Points
Credit cards with reward programs can really pay off — as long as they’re used wisely. The problem is many card issuers know that a certain number of us will spend more than we otherwise would have or will use a card with a higher APR, just to receive the points. It’s called incentivized use, and most of us have fallen for it. It may be obvious, but spending just to receive points or rewards can end up costing you a lot more than the rewards are worth.
Instead, keep close track of your cards’ rewards programs and plan accordingly to maximize the benefits. If you have a card that rewards you more than the average — some cash-back cards offer up to 6% back on certain purchases — use that card when you would already be making a purchase.
2. Making Only Minimum Payments
This is one of the biggest mistakes made by cardholders. Making only the minimum required payment increases the amount of time it takes to pay off your balance, and it also increases the amount of interest you pay over time. That’s because most of that minimum payment initially goes toward paying interest rather than the principal.
Given that the average credit card APR is 15.5% nationally, the fees can add up quickly. If you have a balance of $10,000 at that rate and make a minimum monthly payment of 4% of the balance, it would take more than 12 years to pay off and would cost $14,671 in interest.
3. Maxing Out Your Cards
Running up to the max of your credit limit can cost you in more ways than one. First, it can put a dent in your credit score, potentially causing the interest rates to increase on other cards. That’s because part of your FICO score is tied to credit utilization — credit used as a percentage of your overall available credit.
Also, fees and penalties can be assessed if you exceed your limit. Sometimes this can mean your bank charges a penalty rate, the highest interest rate they have. You should always avoid maxing out a credit card, and in fact, many experts suggest you shouldn’t exceed 30% of your credit limit for any given card.
4. Carrying a Balance to Improve Your Credit
It’s a widespread myth that you need to carry a balance to have a good FICO credit score. Part of the confusion around this is a misunderstanding between credit utilization and having an outstanding balance. There is a big difference between not using your card at all — and paying your card in full before the due date each month. As long as you use your card, your payment behavior will be reported to the credit bureaus, even if you have 0% utilization rate.
Carrying a balance from month to month is not necessary in order to build credit, and typically means only one thing — you’ll be paying interest charges. Given the importance of your payment history, one tip for anyone looking to improve their credit score is to open a credit card account and pay a single recurring monthly payment with it, such as a cellphone or Netflix bill, paying in full each month. This will improve utilization and your track record of on-time payments, and you won’t have to pay interest.
5. Making Late Payments
Paying your credit card bill late is probably the single biggest (and most common) mistake people make. Late payments can hurt you in a number of different ways.
First, your credit card company will charge you a fee for the late payment, which can be anywhere from $35 to $49 or more. Second, they can begin charging you a higher interest rate — even after one occurrence. Third, and perhaps most importantly, your credit score is likely to take a hit as it may show up on your credit report (depending on the issuer and how delinquent it is).
Avoid late payments on your credit card or on any loans or revolving credit accounts you have. Many credit card companies will let you choose or adjust your payment due date, so consider moving it to right after you get paid. You can also set up automatic payments to ensure you never forget a due date.
6. Holding Too Many Credit Cards
This one might not seem obvious, but having too many credit cards can cause headaches, as well. That’s because it’s often difficult to keep up with the rewards plan, APR, payment due date, and other details for a single card. When you begin carrying multiple cards, it can take a spreadsheet to keep track of everything. All of the problems we’ve listed here can be multiplied if you have too many cards in your wallet.
Now, that’s not to say there aren’t good reasons to have different cards for different purposes; just be sure you don’t have more than you can monitor and take advantage of. Card juggling is not for amateurs or the weak of heart — leave it to the professionals.
7. Using Your Credit Card as a Bank Account
Credit cards are easy to use; in fact, they can become a habit before too long. If your habit is to pull out the card to make a purchase without planning or thinking about it, that can lead to overspending and high debt levels before you know it. Also, using your card for cash advances or to spend more money than you have is a recipe for financial disaster.
Instead, consider each of your purchases carefully. Get into the habit of contemplating the use of a card when you pull it out of your wallet. Ask yourself where the money to pay for the purchase will come from and when it will be available. The longer it takes you to pay for something you’ve bought with a credit card, the more it will end up costing you.
Making Credit Cards Work for You, Instead of Against You
It’s hard to beat the convenience of a credit card when making purchases. They’re the preferred method of checking out when we’re shopping online, they’re accepted everywhere we go, and they’re easier to use than most electronic payment systems or digital wallets.
But don’t let this ease of use lull you into making mistakes that could cost you. A credit card can be a useful tool or it can be a ticket to financial disaster. It’s up to you.
Coming Back from Terrible Credit (Where to Start)
Coming back from bad credit can be difficult because people don’t always know where to start. Good or excellent credit may be your goal, but to reach that higher score, there are certain steps you have to take.
If you want to see positive changes in your credit score, there are a number of things that you can do to start on your path to better credit.
Review your credit report
Consumers shouldn’t assume that the information reflected on their credit report is accurate and up-to-date. Reviewing your credit report will allow you to catch mistakes such as the balance on your credit card or the date your last payment was made on your personal loan account.
If you have questions or doubts about the information on your credit report, you can submit a dispute and have an investigation completed to confirm the information. If any information is inaccurate, it could be corrected or removed, and potentially increase your score.
Watch credit utilization
Your credit score is calculated using a variety of information about your finances and your money management skills. Credit utilization accounts for a certain percentage of your credit score and depending on your credit utilization, your score can increase or decrease.
It is recommended that all consumers keep their credit utilization at 30% or less. This means that if your available credit totals $1000, you don’t want to use more than $300 of that available credit. If you go over this percentage, you will likely see a drop in score, and the only way to change that would be to decrease your credit utilization.
Make on-time payments
Everyone has monthly bills that they are responsible for paying. Whether a payment is on time, missed or late, creditors can report this activity to the credit bureaus, which in turn will affect your credit score.
Avoid applying for new credit
Applying for a new credit account will result in a hard inquiry on your credit report. Each hard inquiry can take points off your score whether you are approved or denied, so you will see a significant drop if you continue to apply for credit. Before applying for a credit card, personal loan, or another type of credit account, consider your odds of approval and if applying is worth losing the points.
Pay down debt
The amount of money you owe is another piece of information that is used to calculate your credit score. Paying down your debt can be beneficial to you because you will owe your creditors less money, but you will also increase your score. Basically, the more you owe, the lower your score will likely be. But if you work on reducing your debt, you can easily see a bump in your score.
Unfortunately, it doesn’t take much to ruin your credit. And once it is ruined, improving your score can take some time. Making better choices about your finances is key, so as long as you actively work to improve your score and avoid making mistakes such as defaulting on student loans, filing for bankruptcy, or even making a late payment on your auto loan, you can see a positive change in your score.
Need help recovering from poor credit? Contact Credit Absolute today for a free consultation.
Why is it Important to Monitor Your Credit? (Top Reasons to Monitor)
A person’s credit scores greatly influence their ability to secure a home loan, rent an apartment, or open a credit card account. Yet, many consumers still fail to keep a watchful eye on their credit report.
Checking up on their credit report may not be a priority, but considering the effect that credit has on a person’s life, consumers have more than one good reason to monitor their credit.
Correct inaccurate information
It is common for people to have inaccurate information reflected on their credit report. Creditors can see a lot of information when they check a person’s credit, from the spelling of their last name to the current balance on a credit card account and the last time the bill was paid. However, if this information is inaccurate, the consumer will have to be the one to get it corrected to ensure the creditor will be able to make an informed decision.
One thing consumers can do is file a dispute. In doing so, the consumer is requesting that the credit bureau investigate the information that has been reported. Typically, within 30 days, the credit bureau can inform the consumer of the results of this investigation and whether the information is valid or needs to be updated.
Protect yourself against fraudulent activity
The number of identity theft victims within the US totaled 14.4 million in 2018, according to Javelin Strategy and Research’s 2019 Identity Fraud Study. If an account is fraudulently opened in someone’s name, this account will appear on that person’s credit report. Unbeknownst to the consumer, there is someone out their charging thousands of dollars to a credit card with no intention of paying the bill.
Depending on when a person views their credit report, they will be able to see that there is an open account that they didn’t actually open and take action. Alerting credit bureaus of this activity can get the information removed from the credit report, but people should also report this to the FTC and contact the police, as identity theft is a crime.
Avoid unnecessary hard inquiries
Applying for credit will result in a hard inquiry. One or two hard inquiries on a credit report may not impact a person’s score by a lot, but as the number of hard inquiries increases, a person’s score decreases. Luckily, someone who knows their credit score knows their odds of approval when applying for a personal loan, credit card or another type of credit account.
For example, if a lender requires a borrower to have a score of 650, and an applicant has a score of 600, the chances of denial are high. Should that applicant know beforehand that they do not meet the lender’s minimum credit score requirement, they would be able to find a more suitable option for their credit profile and avoid unnecessary hard inquiries.
Improve/rebuild your credit
Credit reports contain a lot of information about an individual’s finances and credit health. The information that is reported to the credit bureaus is what is used to calculate credit scores, and certain information can cause a person’s score to drop significantly.
When someone monitors their credit, this gives them the opportunity to improve it because they can see what activity is negatively impacting their score. Someone with high credit utilization will be able to determine that using their credit cards less will increase their score. Or that if they avoid applying for credit too often, no new hard inquiries will be listed and decrease their score.
Being in the know is important when it comes to a person’s credit score. Even if they don’t want to monitor their credit on a daily, weekly or monthly basis, obtaining a free credit report every year would still allow them to keep an eye on things and do what is necessary to maintain a healthy credit score.
Do IRS Installment Agreements Affect Your Credit Score? Find Out Here
Paying your federal taxes when they become due isn’t always an option. When you have other debts to worry about and money is tight, you have to consider all of your options. An IRS installment agreement is a solution to this problem, but some people may be hesitant because they aren’t exactly sure how it works and how it can affect their credit score.
If you can’t pay your taxes and are considering alternatives, here’s what you need to know about IRS installment agreements and how your credit score can be affected.
What is an IRS Installment Agreement?
When the tax due date rolls around, taxpayers are expected to have already paid their taxes or to make a payment that day. It is like any other bill that you have to pay, but making one lump sum payment is not ideal for those who simply don’t have the money. Paying the total amount due may not be possible that day, and avoiding this debt is out of the question, so an installment agreement is an affordable alternative that will allow taxpayers to take care of this debt.
An installment agreement is one option for those who need a bit of time to pay their tax debt. An installment agreement is an agreement between the IRS and taxpayers. This agreement gives taxpayers the chance to take care of their tax debt over an extended period of time and ensures the IRS receives the money that is owed.
The IRS will then automatically withdraw payments on the due date every month, or you will make manual payments on or by the due date every month.
Do IRS Installment Agreements Affect Your Credit Score?
Credit scores are calculated using information about your payment history, debt, credit history length, new credit, and types of credit accounts you own. Each of these categories counts for a percentage of the credit score, and depending on a certain activity, people may see a negative or positive score change.
For example, a missed or late payment on your student loan, a new credit card account, and even a denied personal loan application can negatively affect your credit score. An on-time payment or not applying for new credit will have a positive effect on your credit score. That being the case, it is important to avoid certain activities if you don’t want to see a drop in score.
As mentioned above, your credit report will list the debts you owe; however; not all debts will be included in your report. The information listed on a person’s credit report is submitted or reported by creditors, and the IRS does not report federal tax debt to the credit bureaus. This means that an IRS installment agreement does not directly affect your credit score.
Should You Apply for an IRS Installment Agreement?
There are disadvantages to an installment agreement, but the one advantage that makes this option so appealing to taxpayers is that they can pay off their debt over time with no effect on your credit score. If you cannot pay your federal taxes by the due date, then an installment agreement may be the best option you have that will ensure you get this debt paid off and avoid further penalties.
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