How Not to Use a Credit Card
- August 29, 2016
- Posted by: Jeff Gitlen
- Category: Credit Cards
Since their formal introduction in the late twentieth century, credit cards have taken their place in society as a crucial financial tool that people use every day to cover important expenses. They can cover medical bills that come out of nowhere, or they can cover monthly utilities. On top of this, these cards are used to build a history report on your financial performance which is crucial when taking out a loan or mortgage.
Despite being so important, many people do not quite understand the basics of a credit card, nor do they use a credit card correctly. Using a credit card incorrectly is known as credit card malpractice, and it is a huge problem. This is especially relevant in college where young adults simply do not know anything about credit cards.
Today, consumer credit debt is one of the leading sources of debt in the United States, and much of this is due to credit card malpractice. Using a credit card is easy, but there are several things that must be avoided if you want to limit debt and build good credit. Here are several tips on what not to do with a credit card.
Do Not Carry a Balance
Many credit card accounts have a minimum payment due date, and this minimum payment is normally lower than the actual credit card balance. This makes it seem like a credit card bill is easy and no big deal, but this is not the case.
Credit cards come with a regular purchase annual percentage rate (APR). For every dollar that is not paid off within a billing cycle, this APR adds onto that original balance for the next cycle. For example, a balance of $100 that carries over with an APR of 20% becomes $120 next cycle. Interest accrual is big contributor to consumer credit debt, so it is best to pay each billing cycle balance in full every time.
Do Not Over-Utilize Credit
Some people receive a big credit limit which suddenly gives them thousands of dollars of spending power. Credit utilization is the percentage of a credit limit that is spent, and it has an impact on credit score. Unless absolute necessity requires it, it is typically a terrible idea to utilize all of this credit. This can come off as a bad mark on your credit history, but there is an ideal credit utilization ratio to adhere to. Card holders should typically use about 30% of a credit limit for ideal credit score building.
Do Not Spend Frivolously
One of the biggest problems with credit cards is frivolous spending. It is easy to buy something small and forget about, and this can happen many times in a week. The end result is credit debt on top of important expenses, so it adds up to make credit bills much worse.
Many people practice this bad frivolous spending habit. Buying something small with a credit card, then forgetting about the purchase. Next time something small is bought with a debit card. This is not a good practice. If you spend small with a credit card, it is important to not touch your debit account because these funds need to go towards your credit card balance later on.
Do Not Perform Cash Advances
A cash advance is a transaction at an ATM or over the counter where you withdraw cash with a credit card. This should be avoided at all costs. Cash advances come with penalty fees and high annual percentage rates. A cash advance of $100 often comes with around $30 charged in interest as well as a fee of roughly $5. A good practice is to never perform a cash advance ever because you get slammed with fees.
Do Not Perform Balance Transfers
While sometimes this is unavoidable, balance transfers are another transaction that should be avoided at all costs. Balance transfers normally occur when you need to transfer a credit balance over to a new card that has a lower interest rate. This is generally done to save on interest, but it warrants a fee in the form of APR. This advice has something to do with overall credit spending. You should never be in a situation where you have to transfer a balance because it means you spent too much with a credit card.