Unlike other mortgages and debts, credit card debts are the ones which have a lot of churn – day in and day out. Usually we’re incurring new debts on a daily basis and paying them off at the payment date. Though the exact formula for calculation is not official known to the public, but there are five major factors go into a FICO score:
- Payment history makes up 35% of your credit score.
- Outstanding amount makes up 30% of your credit score
- Length of credit history makes up 15% of your credit score
- New credit makes up 10% of your score
- Types of credit used makes up 10 % of your score.
Having a good credit score helps – you get loans at a cheaper or lower APR (thereby saving money in the process). Sometimes you get hit by a bad credit, but life goes on and there are several factors, which you can not control. Still there are lot of factors you can control and bring back your credit score and history from the dust.
Common credit card mistakes are the reasons that so many people end up in debt or end up with problems that will take more than a simple fee payment to rectify. Here are 9 ways to avoid common mistakes to avoid if you want a trouble free credit card experience.
9 Credit Card Mistakes to Avoid at any Cost
1. Late Payments
Payment history is the biggest factor in calculation of credit score and accounts for 35% of a FICO score (FICO, the most common credit score ranges from 300 to 850). Late payments, especially those more than 30 days overdue can cause a huge dent in your credit score: as much as 60 to 110 points, according to CreditCards.com. Apart from that, you will have to pay the late payment fee (usually around $35) and your APR would jump up. Schedule auto payments with full amount due or minimum amount due, whichever works best for your situation, but never ever miss a payment!
2. Doing Minimum Payments
Minimum payments are needed to keep a good credit score, but they do not help you come out of debt easily. An outstanding balance of $5000 on your card with a APR of 17% with a $100 minimum payment will need 30 years to get paid in full and you will end up paying a total of $10,467 over your $5000 (total $15,467)! Instead pay an extra $75 per month ($175 total) and you’ll be debt-free in 3 years and with just $1,455 in interest. Make use federal reserve credit card calculator to understand specifics as per your situation.
Also, read your statements carefully. Thanks to the CARD Act, you don’t have to do the math yourself. Your monthly statement now includes information on how long it will take to pay off your balance by only making minimum payments, as well as how much you would need to pay to erase your debt in three years.
3. Revolving Credit Card Limit
It is recommended that you do no more than 30% of your revolving credit card limits. Get more cards to increase your credit limit and ensure that your old credit cards do not get closed due to inactivity. From credit score perspective, it is better to have a $600 outstanding on a credit limit of $2000 (one or many cards) rather than have an outstanding credit of $600 on a $1000 credit limit.
4. Neglecting Credit Report
If you haven’t been looking at your credit report – brace yourself to be surprised. You may find outstanding amounts for collections and similar items. You’re entitled to free credit report once a year – get it from TransUnion or register for CreditKarma.com
5. Not Using Balance Transfers Effectively
Credit card companies offer balance transfer payments advertizing that you pay high APR debts or consolidate debt. Before you take the offer, do the math to make sure it would be helpful or harmful – usually balance transfers help. For example, you have an outstanding amount of $5,000 on one of your credit cards, which is charging a 14% APR. One of the best balance transfer cards is Discover it®, which offers 0% APR for an astounding 18 months for 3% transfer fee and no annual fee. Using this card (or similar) card would save you $500 over 12 months. Citi Simplicity card also comes with similar features and is a pretty good option for balance transfer.
6. Foreign Transaction Fees
If you travel abroad or purchase items from websites located in other coutries, this is one fees to look out for as it adds up fast. A majority of bank-issued credit cards charge 3% on foreign transaction, including the 1% that Visa and MasterCard charge on foreign transactions. A few credit cards like Chase Sapphire offer 0% foreign transaction fees.
7. Taking Cash Advances
Unless it is an emergency, never ever use your credit card for a cash advance. You’ll incur sky-high interest charges and also pay an upfront fee for the privilege. Worst, interest starts accruing almost immediately. the APR rates for cash advance are higher than purchase APR rates.
8. Paying Excessive Annual Fees
Avoid annual fees whenever possible. If you need to (in case of a lucrative rewards program), make sure that the rewards outweigh the annual fees or at-least nullify it. For example, the Marriott hotel has an introductory annual fee of $0 the first year, then $85. However, it offers 1 free night stay every year after account anniversary, so basically it works out to be free. At the same time, if you have the Amex Platinum credit card, it has a $450 annual fees and benefits are primarily towards travel and fine hotels and resorts. If you do not travel much – there is no point in keeping this card.
9. Closing Old Accounts
You should try to keep your old credit card accounts as long as possible as they help calculate your credit history. Use your old credit card ones in a while to make sure that the issuing authority does not close them due to inactivity. Even when you have to close an account, make sure that the credit limit gets transferred to some other card and you do not get hit by decrease in credit limit.