Card Smarts

Not using the magic plastic properly and responsibly can be ruinous to your credit rating and financial health.

This post comes from Allison Martin at partner site Money Talks News.

Credit cards are like a double-edged sword. They can be quite beneficial if used wisely, or wreak havoc on your finances and your credit if handled irresponsibly.  To help prevent the latter from happening, here are some credit card sins you definitely want to avoid:

1. Ignoring your credit profile

When was the last time you accessed your credit profile and took the time to review the information in it?  It’s easy to assume that your report is stellar because your past reviews indicated so. However, all it takes is one bad move on your part — or that of a fraudster who has stolen your identity — to lower your credit score.  Your credit report could also contain errors, which are commonplace these days, according to a Federal Trade Commission report released last year. As we previously told you:

The study involved working with 1,001 randomly selected consumers who in most cases reviewed three credit reports each — from Experian, TransUnion and Equifax. Twenty-six percent of participants reported a “material error” — something that affected the credit score, not a typo in the address or something inconsequential — on at least one of their reports.  Worse, for 5 percent of the participants, the mistake put them in a greater credit risk tier than they belonged, meaning they were probably paying higher interest rates than they should have been, and may have had smaller lines of credit or more denials than expected.

2. Taking cash advances

“There are some things money can’t buy. For everything else, there’s MasterCard.” Whenever I see this commercial on television, I cringe at the thought of the countless people who’ve come to believe it’s OK to rely on a credit card when they can’t afford to buy things.  This includes cash advances. Many people are unaware that cash advances come with extra costs and are not like simply swiping the magic plastic. You can expect to pay a transaction fee of anywhere from 2 to 5 percent, plus an ATM fee. Also, bear in mind that the amount advanced won’t be eligible for a grace period, and the interest typically begins accumulating as soon as the transaction is processed and hits your account.  Also note: The interest rate on cash advances is higher than the rate charged on regular credit card purchases that you don’t pay off each month.

3. Not paying bills on time

You’ve been struggling to make ends meet. So instead of calling your creditors to see if any payment arrangements are available, you ignore the accounts. A few months go by, and you receive an alert from a credit score monitoring service telling you that your credit score has plummeted.  Unfortunately, one late payment, even if it’s only 30 days late, can tank your credit by as much as 100 points, depending on how high your score was before the delinquency. The better the score, the more severe the hit.  Then there’s the late fee you’ll likely be charged, and the higher penalty interest rate you’ll be stuck with for six months.

4. Exceeding your credit limit

You’re probably well aware that once you reach your card’s credit limit, denials at the point of sale are to be expected.  However, if you’ve opted in to your issuer’s program that allows your credit card to be accepted even for over-the-limit purchases, your credit card company may charge an over-limit fee (although many have stopped that practice).  Do expect a hit to your credit score, because your credit utilization ratio accounts for 30 percent of your FICO score.

5. Applying for too many cards

Applying for lots of cards? Don’t. Too many applications for credit signal desperation and trouble in paradise to lenders. Excessive “hard” inquiries, noted in your credit files when you apply for credit, can lower your FICO score, particularly if you’re new to the credit world.

6. Being enticed by credit card offers in the mail

The bonus points or miles or cash back offered to new customers of rewards credit cards may seem too good to pass up. But understand that preapproved offers don’t guarantee that you’ll be approved, or that you need the card, or that it’s a good fit for you. If you rarely leave town, you probably don’t need a frequent-flier card.  Fail to heed my warning, and you may find yourself tempted to spend to earn bonus rewards and bogged down with debt.

7. Abruptly shutting down accounts

You may be tempted to close your credit card accounts because they are no longer useful to you, but beware of the impact this could have on your credit utilization ratio.  And if you’re thinking that closing accounts will release you from your responsibility, think again. Not only will you still be liable for the outstanding balances, but the accounts will remain on your credit report for seven to 10 years.

8. Ignoring statements

Human error and credit card fraud are often responsible for invalid transactions and statement errors. But if you don’t look at your statement every month, how can they be detected? It’s not a bad idea to examine account activity on a weekly basis to catch a problem.  You’re not liable for fraudulent transactions on your credit card unless you wait longer than 60 days to report them to your card company. So it’s your job to keep your eye on your accounts.

9. Applying solely based on a promotional offer

It never fails. Every time I’m in a department store and go to the register to pay, a clerk always finds a way to squeeze in the sales pitch about the irresistible store credit card offer that I have to take advantage of.  I politely decline, but I’m definitely thinking: “Receiving a measly 15 percent off my purchase does not make up for all of the high interest and fees that come with these cards.” In other words, the costs can outweigh the benefits.  I’m not suggesting that you refrain from signing up for a card that will actually be of major benefit to your family (i.e., free travel and cash back). Just be sure that the annual fee won’t swallow up all the perks. And if you carry a balance on a rewards card, the higher interest rates these cards generally have will nullify the benefits.

10. Failing to read the fine print

When you apply for a credit card, you are agreeing to take full responsibility for any legitimate charges made with the card. So you definitely can’t afford to ignore the disclosures.  Fortunately, even if you make a few mistakes along the way, credit can always be repaired over time. But it’s best to avoid these 10 credit card sins.

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