Credit Card Traps
We have a love affair with credit. Our habit of financing our excess lifestyles with our credit cards proves it. But just because we can charge something doesn't mean we can afford it. A reported 58 percent of families carry a monthly balance on at least one credit card. And according to the American Bankers Association, the number of people making late payments or no payments at all on bank-issued credit cards is rising.
Credit card debt and the resulting credit rating grief are not just the result of overspending: they also occur when consumers fail to factor in interest and other fees on their credit card purchases. Hidden fees and penalties can get you into trouble - even debt. Learn how to protect yourself. Avoid credit card traps.
Below are smart steps to keep credit under control.
Limit Yourself to one credit card. The easiest way to curb your debt on credit cards is simply to have only one of them. You should have a low interest rate card and that's it. Do not collect credit cards! More is not better.
Always make your payments on time. Late or missed payments result in fees that have sky-rocketed in recent years. A $30 late charge for a payment that's only one day late is common. Your company can also increase your interest rate without notifying you if you're late just once.
Paying late even once can also lower your credit score, which means you'll pay higher interest rates on cards, loans and mortgages for years to come - or you may not qualify at all. Other cards you currently carry may increase their rates, too, since late payments affect your overall credit history and make you appear to be a credit risk.
If you must carry a balance, pay at least your minimum monthly payment (and preferably more) on time. If you have trouble getting to it, set up automatic payments from your checking account for the minimum amount and follow up with larger payments as you can afford them.
Once your rate has been increased due to a late payment, it can be hard to get it lowered. Most companies will consider a rate reduction if you request it and you've paid on time for a year, but your rate may never again be as low as it was originally.
Keep your credit limit low - and your spending lower. Your credit limit is the maximum amount in charges you can carry on your credit card. It's initially set by the credit card company based on its assessment of your ability to pay, but you can request an increase and the issuer often raises it automatically. Yet bigger is not always better. Your credit limit should reflect what you could reasonably pay off in a few months.
Maintain a credit limit of no more than $1000 to $4000 and don't use more than 50 percent of it. Having a lot of outstanding credit can actually make it more difficult to get a mortgage. When you get an automatic increase, call to decline it.
Shop around for the best rate. The annual percentage rate (APR) is the interest rate you will pay if you carry a balance, take out a cash advance or transfer a balance from another credit card; it's generally higher for cash advances. Be aware of the different ratesm which should be listed on your statement, and if you use cash advances or transfer balances, check to see how your payments will be applied toward each category. Companies may erase your lower-interest loans first, which maximizes the interest you still have to pay.
Credit card companies often tempt customers to switch cards with offers of better APRs or low interest balance transfers. Consumers need to be proactive and look for the best deal. Find out if your credit card company will match a lower rate.
Two caveats: Closing a long-term account may cause a temporary blip on your credit rating, but that's only a concern if you need a mortgage in the next six to 12 months. Also watch for transfer fees, which run as high as 4 percent of the amount transferred.