We’ve all heard the advice: Use credit cards wisely. Still, knowing what’s smart and doing what’s smart can be two different things. And with an increasing number of U.S. young adults putting purchases on plastic — 57 percent of 18- to 34-year-olds say they use credit cards today, versus 48 percent in 2013, according to Mercator Advisory Group’s recent CustomerMonitor Survey — that advice is worth repeating.
Are you guilty of any of the following five bad credit card habits? If you circled “yes,” it’s time to change your ways. Otherwise, stay far, far away from these behaviors:
Mindless charging. Some people use credit cards with the mindset that “it doesn’t count” if it’s paid for with plastic instead of cash, says Gina Pogol, senior marketing manager with LendingTree.com, who was also a loan officer for 10 years.
Back when she was a mortgage lender, a client financed a house with her. This client had more than $100,000 in credit card debt and barely qualified for a small mortgage, Pogol recalls.
“Her credit report looked like the rap sheet of a career criminal, about 10 pages long. And she had over 40 credit cards, many of them maxed out,” Pogol says. “I asked her about them, imagining that there’d been some catastrophe in her past, like an illness or disability that I could explain to lenders.”
Unfortunately, no such luck. Pogol’s client admitted that she had “gone a little crazy” after getting a well-paying job managing a casino, and she had bought herself anything she felt the mildest desire for.
The client told Pogol: “I didn’t deny myself anything. I assumed I could afford it if they were giving me the credit.
Pogol says the client did manage to close on the house she was buying. But trying to pay off the credit card debt and pay for a new house didn’t work. She lost her home within the year.
Paying only the minimum amount due. It’s understandable that if money’s tight, you may not feel like parting with hard-earned cents to pay down your credit card debt.
But you’re just hurting yourself in the long run, says Robert Stammers, director of investor education at CFA Institute, a global nonprofit association of investment professionals.
“People who pay the minimum on the credit cards are extending that time period on everything that they buy, and [this] is the main reason that people can build extraordinarily large credit card balances that they can’t hope to pay off,” Stammers says.
He adds that if you’re going to use your cards and carry revolving debt, you at least need to know that it’s going to be paid off within a time frame that works for you.
Adding to your revolving debt by making nonessential purchases. All revolving credit card debt should be avoided, of course. But if you’re carrying revolving debt on a credit card, and then your car breaks down, and you don’t have the money to pay a mechanic, you can make a good argument for whipping out your credit card.
You need that car to get to work, or to shuttle your kids around, and if you live in the suburbs or countryside, you probably don’t have a bus service to utilize. So, yes, getting the car fixed is essential.
But buying a pair of shoes when you already have a closet full of them or going out to eat with a credit card that has revolving debt is a) problematic and b) not essential, says Albert Williams, a personal finance professor at Nova Southeastern University in Fort Lauderdale, Florida.
“This pay-later [plan] is really creating a loan that is interest-bearing,” Williams says. “This is a bad practice but people do it often.”
In other words, if you’re still paying off that mechanic six months from now, you probably won’t hate yourself. You needed that car fixed. If six months later, you’re still carrying debt on cheeseburgers, fries and shakes, every time you look at your credit card statement, you probably are going to experience indigestion.
Using your credit card for a cash advance. If you’re short on cash and you really want some actual bills in your wallet, it may be tempting to take out a little cash. But you might as well just rip it up.
“Creditors charge higher interest and reduce grace periods for cash advances because they are hoping that you will borrow cash from them,” Stammers says. “The only thing worse than using credit to buy things that you can’t afford, is to borrow cash to buy things you can’t afford.”
In fact, if you take out a cash advance from a credit card, not only will you pay interest, you may get a transaction fee, which could be as much as 5 percent of the cash advance. Stammers also points out: “At least when buying things from the store, you can return them should you have buyer’s remorse.”
You can pay back your credit card immediately, of course, if you get a cash advance that you immediately come to regret. But no matter what, Stammers says, you’ll end up paying the interest accrued on that cash — as well as the transaction fee.
Having too many credit cards. There are good reasons to have some credit cards, but it’s difficult to justify having lots of them.
“The average number for most people with credit cards is four,” Stammers says. “However, once you get a credit card, you really have to live with it, since canceling the card can hurt your FICO score. That’s because a great deal of it is based on the equation of credit used over credit available. Try to have cards that equal the amount of credit that you can use and more importantly, can manage.”
(Obviously, if you have some credit cards and feel you need to cancel them lest you’ll max them out, cancel them. But Stammers’ point is that most people can’t just apply for a seemingly endless number of credit cards. Eventually, your credit score is going to be somewhat negatively impacted by having too many of them in your wallet, regardless of whether they get used or are misused.)
Leslie Tayne, a New York City-based attorney, debt specialist and author of the new book, “Life & Debt: A fresh approach to achieving financial wellness,” agrees that having too many credit cards is a bad habit consumers develop, thanks to all the store cards out there.
“I often see people with over 20 credit cards, all of which have balances,” she says. “This makes it hard to keep track of that many cards, for issuing payments on time.”
And balances, she adds, can quickly add up.
That’s not to say that if you can replace your bad habits with good habits, you can’t benefit from these cards. “Store card discount incentives can be great if someone has a plan to pay off the balance,” Tayne says. And having a plan to pay off the plastic is generally the key to creating and maintaining good habits with credit cards.
If all else fails, remember the universal rule of credit card usage: If you don’t pay it now, you’ll really pay for it later.
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5 Bad Credit Card Habits to Break Now originally appeared on usnews.com
