Did You Know … Three Ways to Avoid Common Credit Card Mistakes

March 28, 2018

Credit cards are, by far, my favorite form of credit. Portable capacity, iron-clad fraud protections, superior buying power, and free money if you pay your bill in full each month. But for some reason, they
are roundly vilified in the court of public opinion, likely because of the horror stories that can come from excessive and irresponsible use. But if you’re careful, a credit card has more benefits than any other
form of credit.

Pay It in Full Every Month, Without Exception

The average interest rate on a general use credit card (e.g., Visa, MasterCard, Discover, and American Express) is about 17 percent. The average interest rate on a retail store credit card is well over 20
percent. That means credit card debt is likely the most expensive debt you’ll ever service. But, unlike almost every other form of credit, interest on credit card accounts is optional and completely avoidable.

Interest is only applied if you carry a portion of the balance from one month to the next. This is called “revolving.” The amount you revolve from one month to the next is subject to interest, which is added to the amount you currently owe. If you’re not careful and pay no more than the minimum amount each month, your credit card debt can spin out of control. The simple way to avoid paying any interest, ever, is to pay your balance in full each and every month. If you’re able to do this, then the interest rates become meaningless because you’re not paying any interest.

Don’t Max Out the Credit Limit

Every credit card has what’s called a credit limit. The limit is the uppermost boundary of your buying power. So, if your card has a credit limit of $10,000 then you won’t be able to spend more than $10,000
without the approval of your credit card issuer. The amount of the limit you use is very influential to your credit scores.

There is a metric in credit scoring systems called “revolving utilization” or the balance-to-limit ratio. This ratio represents whatever percentage of the limit you’ve already used. So, if you have a $5,000 balance and a $10,000 limit, then your balance-to-limit ratio is 50 percent. Generally speaking, the higher that ratio, the lower your credit scores are going to be. Shoot for keeping that percentage as low as you possibly can.

Never Miss A Payment…Ever

Every credit card statement has a due date. That’s the date by which the card issuer expects to receive at least the minimum payment due in order for your account to remain in good standing. If you are even one day late, then your account is considered “past due” or “delinquent.” At the very least, delinquent accounts will be assessed a late fee which is generally around $39. If the account goes too delinquent, then the card issuer will be allowed to report a record of the late payment to the credit bureaus, which will remain on your credit reports for up to seven years and can lower your credit scores. Even if you can only afford to make the absolute minimum payment due, make it before the due date without exception.

Disclaimer: The views and opinions expressed in this article are those of the author John Ulzheimer and do not necessarily reflect the official policy or position of VantageScore Solutions, LLC.

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