5/25/2012 3:20 PM ET
Using plastic can be convenient and even rewarding. But if you handle credit poorly, you’ll pay dearly in time, money and frustration.
Likely you’ve lost your credit card bill under a pile of papers at least once. By the time the bill surfaces, it’s past due. Congratulations, you’ve just committed one of the seven deadly sins of credit card use — and the costs will add up.
Yes, the best credit cards make paying convenient. Compare the time you save when you swipe your credit card at the gas pump with the hassle of stepping inside a cramped, noisy convenience store to hand over cash. When you pay with plastic, you can also rack up credit card rewards. But committing any of the following credit card no-no’s can ding your credit score, cost you money and even eat up some of that time you thought you’d saved.
“The No. 1 deadly mistake is paying your bill late,” says Manisha Thakor, the author of “Get Financially Naked.” “People say, ‘It’s just a day late — it’s not a big deal.’ But a lot of people don’t realize that being an hour or a day late is as bad as being five days late.”
And you can end up paying in multiple ways. First, a late credit card payment can cost you up to $25 in late fees, plus interest. Second, your low-interest card can quickly become a high-interest-rate card, says Jessica Cecere, a former regional president for CredAbility of South Florida, a nonprofit for credit counseling and education. “You can be late one time and you’re done,” she says. “You might have a 12% interest rate and it could go to 24%.”
Finally, your credit score also can be affected. “The timeliness of your credit card payment is 35% of your credit score,” Thakor says. “One small thing — being late — mucks up a third of your credit score.”
Paying Only the Minimum
“A lot of people are still paying off Christmas 2010,” says credit counselor Patrick Owens, of ClearPoint Credit Counseling Solutions in Richmond, Va. Bad idea. You’ve probably noticed that your credit card bill now has a required box showing how much you’ll pay over time if you cover only the monthly minimum payment. “You may be paying for 20 years on a couple thousand dollar balance,” he says.
You could end up paying nearly double for that cute outfit or fancy meal, Thakor says. “A rough rule of thumb is, if you have an interest rate in the high teens or above and just make the minimum payment, you have essentially almost doubled the price,” Thakor says. “So that $100 pair of jeans cost you nearly $200.”
Co-Signing for a Credit Card
Many parents co-sign for a young adult child’s credit card with good intentions, hoping to help the child establish credit, Owens says.
“But it’s a gamble for parents when you add children on,” he continues. “Some kids have not used credit cards before and they run up a big balance. That causes problems for both the kids and the parents.”
If you’re co-signing for a credit card, first make sure your child understands how credit cards work, Owens says. Also, consider a secured credit card or prepaid debit card set up with money to cover the balance, he advises. When the money’s in such an account is gone, the card can’t be used anymore.
It’s not just parents getting burned on co-signing for a child’s credit card. Sometimes it’s the other way around, Thakor says. “I’ve seen cases of kids helping adult parents,” she says.
Co-signing for anyone can be a bad idea, Thakor says. “It’s like unprotected sex once you co-sign,” she says. “The other person’s reputation is reflecting back on you. And if they don’t pay, creditors are going to be coming to you next for that money.”
Letting Someone Else Use Your Credit Card
Letting someone borrow your credit card can cause problems that go beyond exposing you to financial risk. “One of my friends lent her credit card to an individual to use at a store,” Owens says. “His name wasn’t on the card. They asked for ID at the store and when the name didn’t match, they confiscated the card and she had to go to the store to pick it up.”
Robbing Peter to Pay Paul
While a balance transfer to a low-rate card can save you money on interest, if you’re transferring the balance because you can’t afford to pay it, that’s a bad sign, Cecere says. “You’re not actually getting yourself anywhere when you do that,” she says. “You’re robbing Peter to pay Paul. That’s not only one of the seven deadly sins, but also a warning sign you’re in financial trouble if you’re using one card to pay another.”
Too Many Credit Cards
Rewards programs and store discounts can entice you to apply for, and end up with, too many credit cards, Cecere says. “If you apply for too many cards at once, your credit score will go down,” she says.
Canceling All of Your Credit Cards
Perhaps you’ve decided to just get rid of all your credit cards — the business credit card, the gas credit card, the rewards credit card. All the plastic, gone. Then you can’t possibly mess up your credit. Right?
Wrong. “You don’t want to cancel all your credit cards at once,” Cecere says. Then you have no available credit, she says. Further, you’re essentially closing the book on your credit history, which will lower your credit scores. Instead, pay them all off but don’t close them, she advises.
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