Most of us would love to improve our credit standing and get the best available rates and terms on credit card offers. And right now, in this post-holiday period, lots of banks are sending out various credit card deals. Having a great credit rating can be achieved in part by knowing how to manage your credit cards well, and by avoiding the following potentially costly credit card blunders.
1. Fixating on Freebies
Have you ever accepted a credit card just because it offered juicy perks like a cash-back reward, frequent flier miles or travel points? Those “freebies” can be a good deal, but only if the card itself is a good deal. How do you know if you’ve got a good credit card? Judge the card based on the interest rates and terms – not whether or not you get brownie points for using the card at your local gas station. After all, what good is another 1,000 “free” points if the card you’re using has an exorbitant interest rate and a very high annual fee?
2. Charging Too Much
Overspending is not just a fast way to incur excessive debt. It could also hurt your credit rating. Your credit score is based in part on the amount of credit card debt you’ve charged. For the highest possible VantageScore or FICO credit score – in the 760 to 850 point range – keep your credit card debts low, at less than 10% of your available credit.
The more credit card debt you charge, generally speaking, the more that negatively impacts your credit health. When you charge more than 50% of the credit limit on your credit card, you take an extra hit to your credit scores. So let’s say you have a card with a $3,000 limit. If you charge more than $1,500 on that card and carry a balance, expect to see your FICO score fall. Charging too much in the current environment can be especially painful in the wake of the “credit crunch.”
An increasing number of banks are monitoring consumer spending and repayment patterns. If they think you’re charging too much and/or paying too little, you could find yourself facing higher interest rates, or worse – your access to credit could be cut off altogether, with your creditor closing your account.
3. Closing Old Accounts
One of the myths many consumers have about boosting their FICO credit scores is that by closing out an old account, especially one where the balance has been paid off, they’ll raise their credit score.
The truth is that the opposite usually occurs. When you close out an account, you choke off that part of your credit history. And 15% of your FICO score is based on the length of your credit history.
4. Accepting the Wrong Credit Cards
If you’ve had financial troubles in the past, you might be tempted to accept any old credit card offer that comes your way. But don’t.
Avoid sub-prime cards whenever possible. These cards have very high interest rates and ridiculously high fees. It’s not uncommon to find sub-prime cards at 25%-plus interest, that give you a $500 credit limit, but then impose $200 or more in miscellaneous fees.
So right off that bat, you’re in debt, and the credit limit you have is far lower than you expected. What about secured cards if you’re trying to build credit or re-establish credit after severe problems like a bankruptcy? For starters, don’t stress yourself out if you can’t get a regular credit card after your bankruptcy has been discharged. Instead, start small. Do go ahead and get a secured card, where you have to put up a certain amount of cash into an account.
The amount you put up, let’s say it’s $1,000, is typically your credit limit. Just pay your bills on time every month and you will slowly but surely establish a track record of someone who is credit worthy. Soon you’ll find that other, better credit offers come your way. And I don’t mean credit cards from your favorite electronics store or clothing retailer either. Be aware that the department store credit card offer you accept – you know, the one from the nice cashier who offered you a 10% discount on your purchase – can also wind up costing you money.
Applying for department store credit cards creates inquiries on your credit report that lowers your credit scores. More importantly, these cards carry higher rates – on the order of 21% and above – than do national cards, such as a Visa, MasterCard, Discover or American Express card.
5. Transferring Balances the Wrong Way
So you received a balance transfer offer in the mail and you’re all smiles because you’re ready to save a bundle on finance charges right? Not so fast.
Make sure you transfer balances the right way or that smile will soon turn to a frown. To begin with, don’t close old accounts, for the reasons mentioned above. Also, don’t max out your spending limit on a new card. That will hurt your credit score.
Do know what fees may be involved in a balance transfer and when your promotional rate expires.
Lastly, limit transfers to one or two within 12-18 months. One trick to managing credit is to avoid overdosing on it; only apply for credit when you really need it.