The regulations for credit cards have become more consumer-friendly over the past two years, but there are still hazards to using cards that you should be aware of. To save money and maintain a good credit score, watch out for the following 10 credit card pitfalls:
Pitfall #1: Having your credit limit cut
Your credit limit can be reduced even if you pay your credit card bill on time every month. A lower credit limit may result in a lower credit score because it’s based in part on how much you owe relative to your available credit. Having a higher debt-to-credit ratio can cause your credit score to fall, which can make it more difficult and expensive to get approved for credit in the future. A good rule of thumb is to never charge more than 30% of your available credit. For example, if you have a $3,000 credit line, never let your account balance exceed $900 (30% of $3,000).
Pitfall #2: Exceeding your credit limit
The new credit card law doesn’t allow a card company to charge you an over-limit fee, unless you agree to it. That means they’ll process transactions that exceed your limit, but charge you a fee for the service. Be sure to monitor your balance so you never rack up unnecessary over-limit fees.
Pitfall #3: Letting an account go inactive
If you don’t use a credit card periodically, you run the risk of having it canceled for inactivity. For cards that you want to keep, make a small charge at least once every few months and pay off the balance in full.
Pitfall #4: Canceling a card
You should never have more credit cards than you really need; however, closing an account can lower your credit score. This is especially true if you’ve owned a card for many years, have used it responsibly, and have a high credit limit.
Pitfall #5: Interest rate hikes and fees
The law generally prevents card issuers from increasing interest rates on your existing balances, except when you’re more than 60 days late making a payment. However, they can raise rates on your new purchases with a 45-day notice. If you don’t want to pay a higher rate, you can cancel the account and pay off your balance under the old account terms.
Pitfall #6: Not making on-time payments
When you have a good track record for paying bills on time, you’ll maintain a higher credit score and reduce the likelihood that a card company will cut your credit limit, cancel your account, or increase your interest rate.
Pitfall #7: Making minimum payments only
You should pay your credit card bill in full each month-or at least pay as much as you can. Carrying a balance from month to month doesn’t increase your credit score, it just costs you money. That’s because interest accrues each month, even when you make a minimum payment. Your purchases could end up costing you double or triple their price, depending on your interest rate and how long it takes you to pay off the card.
Pitfall #8: Using no-interest cards carelessly
Zero interest or balance transfer cards allow you to pay little or no interest during a promotional period. They can be a handy financial tool if you pay off the entire balance by the end of the promotion. But if you don’t pay the bill in full, you typically get stuck with a huge interest rate.
Pitfall #9: Paying annual fees
There’s no reason to pay an annual fee to have a credit card, except perhaps for a rewards card. However, if you don’t use the rewards or if their real value is less than the annual fee, the benefits may not be as good as you think.
Pitfall #10: Co-signing an account
If you co-sign for a credit card with someone that means you’re responsible for their purchases if they’re unable to pay or if they die. Your credit can be positively or negatively affected by the actions of a co-signer. Instead of co-signing, having an authorized credit card user might be a better option, depending on your situation.
Laura Adams is the author of a new book, Money Girl’s Smart Moves to Grow Rich. Pre-order it now at SmartMovesToGrowRich.com or from your favorite book seller. She blogs and hosts the Money Girl weekly podcast on Quick and Dirty Tips.