Finance Blog
Seven Bad Credit Card Habits
Credit can help you make big purchases and achieve your financial goals, but too much credit and debt can be dangerous. The average U.S. household has nearly $8,000 in credit card debt, according to the Federal Reserve. Chances are if you’re in a lot of debt, you may also be guilty of some of bad credit habits.
But even those who aren’t swimming in debt may find themselves committing at least one bad habit, which may be hurting their credit score. Avoid these seven bad credit habits to keep your finances healthy.
1. Paying late
Paying late may be the cardinal sin of credit card ownership. Late payments literally cost you money. You are hit with a late fee, your interest rate may go up, and your credit score may take a hit, which will make it harder for you to get lower interest rates on future loans. Payment history accounts for the largest component (35 percent) of your credit score, so paying on time is vital.
2. Making only the minimum payment
If you’re making only the minimum payment on a credit card and not thinking about it until the next bill comes, you aren’t taking into account the interest that will be accruing over the life of your debt. The best practice is to only charge what you can afford to pay off every month, but if you’re stuck with some credit card debt, you need a plan to pay it off as quickly as possible. First, stop charging on an account where you carry a balance. Then, pay at least the minimum plus the amount of interest you’re being charged. That way, at least you won’t be charged interest on your interest. Finally, throw any extra money that you can spare into the account until it is paid off.
3. Maxing out a card
Maxing out a card may leave you struggling with a big bill, but it also messes up your debt-to-available-credit ratio, which is a factor in your credit score. The amount you owe accounts for 30 percent of your score, and so you want more available credit than debt.
4. Having too many cards
Most credit experts will recommend having no more than two credit cards. Why? It’s too easy to max out or miss a payment. With mortgage or rent, gas, electric, Internet or cable, and phone bills every month, do you really want to add five or six due dates for all your credit cards?
5. Not having an emergency fund
If you don’t have an emergency fund established, chances are you’re treating your credit card as the emergency fund. A solid emergency savings fund should cover your expenses for anywhere from three to six months—but the more the merrier. If you are suddenly slammed with a big dental bill, lose your job, or need to replace a broken refrigerator, you will have the money saved up to cover these bills. You have enough to worry about—you don’t need to worry about racking up debt too.
6. Letting other people use your credit cards
It might be your oldest friend, your reliable son, or even your own mother, but every single charge another person makes on your credit card eventually becomes part of your credit report. If these trustworthy folks don’t pay on time or rack up more debt than you can afford, your credit score will hurt, not theirs.
7. Canceling all your credit cards
For the same reason you shouldn’t max out your credit cards, you also shouldn’t close a bunch of credit cards. By closing your credit accounts, you are narrowing the amount of credit you are issued and changing your debt-to-credit ratio. By eliminating a $5,000 credit line, you will take $5,000 of available and unused credit off your report.
Ilyce R. Glink is the author of several books, including 100 Questions Every First-Time Home Buyer Should Ask and Buy, Close, Move In!. She blogs about money and real estate at ThinkGlink.com and at the Home Equity blog for CBS MoneyWatch.
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My name is Carol Barnes and someone by the name of Carolyn Barnes is showing up on my Credit Report, I have send a copy of my Social Security Number and a copy of my drivers license. Would you please take care of this discrepancy as soon as possible.
Thanks
Wow, this is not the correct way to contact Equifax.
I have seven (7) cards, 5 major, 1 dept store, 1 electronics store that date back to 1986 (around 70K combined limits). Use 1 Amex for convenience and pay in full each month; will sometimes run small balance on electronics card at 0% for 2 or 3 months, other cards have 0 balances and are used about twice a year to keep them active. The interest rates are between 14% and 18%, credit is excellent (774) but have been unable to get any of them lowered. What is the best way and which cards to close with the least impact on credit score? I would like to open a new card at my credit union in the event I needed to run a balance for a month or 2?
Hello Sanj,
Why close any cards? I have spent days researching the various credit agencies and card issuers for an upcoming blog posting. It seems the best advice is to only close a card with late payments or negative feedback. Otherwise, it is best to keep your utilization rate or debt to credit line percentage as low possible. I have a Discover card with a low introductory rate of 0% until January 2013, which you might apply for. If you are looking for any credit card, ask a friend with a Discover card to refer you. Discover will pay the cardholder $50 and you will also get a $50 reward. FYI, I do not work for or affiliated with Discover in any way. I learned it in my research and thought it was a great offer. If you are looking to buy a home, car or other large purchase, you might wait until after receiving the loan to apply for a credit card.
Number 7 doesn’t seem to be a habit. It doesn’t even seem to be particularly good advice.
Your credit score helps you to acquire new lines of credit. Someone who is struggling with debt absolutely *does not* want to get any more credit. Escaping the trap of debt is far more important than a credit score. If someone finds that they are unable to resist the urge to use their credit cards then they should not hesitate a moment before canceling them all.
I periodically go through my credit report and close any store cards I no longer want or shop at. I also have closed some very large lines of credit bank cards I have had for years and did not use, as a consolidation practice. It is difficult to maintain control and monitor too many cards. If the credit bureaus do not like that and decide to impugn my credit score, I don’t much care. I don’t know how they could find a better credit risk than my wife and me.