Credit cards can be your friend or your enemy and, just in time for the new school year, here are some tips on staying on the right side of credit cards.
Kiplinger's, a Washington, D.C., financial information service, says a single misuse of a card can hurt your credit rating, add interest points to your loans and create costly problems, even under the new federal consumer protection rules for credit cards.
To avoid making expensive mistakes, keep away from these 11 common credit card mistakes.
>> Paying card bills late
It's the biggest foul, because you not only get hit by a late fee but also end up paying higher rates on your card balance. Late fees of $40 are common, and two late payments in a row cause penalties to soar. Payment history also makes up more than one-third of your credit score, and a single payment can drop your score sharply. Allow time for mail delivery or pay online with time to spare.
>> Bungling balance transfers
Moving debt to a lower-rate card can make sense, but read the fine print. Low introductory rates often don't last long, and you could end up paying higher rates. Watch out for transfer fees, and do some calculating to see what you will actually save.
>> Making minimum payments
Paying more than the minimum makes a huge difference in the cost. With a $5,000 balance and annual interest of 14 percent, a $100 minimum payment will pay off the bill in 22 years, with $6,110 going for interest. If you pay $150 a month, the bill is gone in four years with $1,369 in interest. The new federal credit card law requires statements to show how long it would take to pay off a card with minimum payments and how much you would need to erase your debt in three years.
>> Using up all available credit
Carry no more than 30 percent of your card limits. Higher balances can hurt your credit score. Use all your cards periodically — but don't have too many — to avoid having the account closed, and keep each balance as low as possible.
>> Ignoring monthly statements
Take a few minutes and look it over for mistakes and for unfamiliar charges that could signal identity theft. Call immediately to report possible problems. Check the bill for ways to reduce your costs, such as impending rate increases, and double-check the due date to avoid late fees.
>> Racking up foreign transaction fees
Using cards in other countries can add as much as 3 percent to charges, although some cards waive the foreign fees. Check your card company's policy before you go, and use the cheapest one. The same goes for debit transactions and ATM withdrawals while you're abroad.
>> Taking cash advances
Do not use a credit card for cash advances except in an emergency. Interest rates are high, and often there's an up-front fee. Plus, interest starts accumulating immediately, rather than waiting for a grace period. One popular card has a $50 fee and 25.24 percent interest for a $1,000 cash advance. That will cost $71 even if you pay the money back in a month; after a year, it would cost you $300.
>> Spending to earn rewards
Don't get sucked in by "free" rewards, such as cash back or airline tickets, and end up making unnecessary purchases to hit a point total. Check the fine print on cash-back rewards, which may actually require lots of charging before you qualify.
>> Paying excessive annual fees
Fees may eat up any value from rewards you get, and rewards are tied to how much you charge. You can shop around for lower fees, but make sure you understand the terms of each card and make sure you pay bills on time and limit your debt.
>> Chasing teaser rates
Banks offer 0 percent interest rates, but make sure you know how long that lasts and what the rate will be afterward. The new federal law requires such rates to last at least six months and requires lenders to notify you when the offer ends. Make sure your balance is as low as possible — or gone — when the rate goes up. And know that repeatedly switching cards to get promotional rates can hurt your credit score if you end up with too many open lines of credit and too many recently opened accounts.
>> Neglecting credit scores
Learn how to improve your credit score, including the impact of credit cards. The five factors in a credit score: payment history, amount owed, length of credit history, new credit and type of credit. A poor showing in any category can drop your score.
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