How Not to Use a Credit Card
How much you charge and how vigilant you are about paying your bill can affect everything from whether a landlord will rent to you to how much interest you’ll owe in the future.
Illustration by Lia Kantrowitz
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Seeing your name embossed on your first credit card is pretty thrilling because it means you can lock down that ski trip during winter break you’ve been stalking for months. Toss in a new ski vest, a lift pass, and—what the hell—a pass for your BFF too.
But once you’ve skied down the last slope and are faced with the credit card bill, the sobering reality is you have to pay hundreds of dollars you may not have. Unfortunately, overspending with a credit card is far too easy especially when it’s your first one. “In the short-term, people may experience a rush and the use of a new product or service from their spending,” explains Roger Ma, certified financial planner. “The long-term implications may not be so apparent.”
Those long-term implications include a crapload of debt that stalks you harder than your middle school ex on Instagram. People age 35 and under have credit card debt averaging about $5,088—and considering that you are being charged a 17 percent annual interest on average, you’ll wind up paying back nearly $6,000 for every $5,000 in charges you put off paying for a year. You can also get into trouble if you add an authorized use who doesn't pay you back or shop on suspicious websites, which can steal your credit card information and even your identity.
So before you go nuts with your first credit card, take a few minutes to consider all the ways you shouldn’t use it:
Charging up to the full limit
Running your card right up to the limit tells lenders you aren’t a good money manager so doing this will have a negative impact on your credit utilization ratio, which can impact 30 percent of your overall credit score.
Why should you care about a credit score? “A credit score is basically a financial grade that tells companies the likelihood that you'll pay back money that is loaned to you,” Ma says. A higher score translates into being able to get a car loan, being approved to rent an apartment or buying your first house. Credit scores range between 300 and 850 and the higher your score, the better.
“Don’t let your credit card balance go above 30 percent during a monthly cycle, even if it means you have to make multiple payments,” Greg McBride, chief financial analyst at Bankrate, says. “Also, if you want to raise your credit score, keep your utilization below 10 percent. Charging below 10 percent has the most positive impact on credit scores.” Maxing out even a single card, on the other hand, can lower your credit score by as much as 45 points.
Skipping a payment
Paying your credit card balance late or not making a monthly payment means interest grows, you could be charged a late fee, and your credit score will drop. Instead, always pay your balance in full each month. If you need help remembering, set a reminder on your phone.
While most cards charge late fees, which can be as high as $38, some cards like Citi Simplicity and Citi Double Cash actually encourage you to skip a payment by not charging and late fee at all. But make no mistake, interest is still accruing. “Just because a credit card is advertising something like this, it isn’t a license to skip making a payment,” he said. “Missing payments will ultimately hurt your credit once it is more than 30 days late, plus the interest tally continues to mount.”
If you accidentally make a late payment on a card that does charge a fee, call your credit card provider and ask them to waive it. “Most of the time the credit card company will waive to the fee,” Grant Sabatier personal finance expert from Millennial Money, says. “And if the first person you call doesn’t do it, call back and see if the next agent will. Sometimes it depends on the agent.”
There’s a limit to how late you can be without getting penalized though. Making a payment more than 30 days past its due date can drop your score as much as 110 points.
Paying only the minimum
Unfortunately, it’s not enough to just pay the minimum each month. Not paying the full balance each month can turn that $4 latte you charged into a $40 latte if you only make the minimum payment, thanks to accrued interest over time. You can also get into trouble if you signed up for a card with zero percent or a low interest rate and you forgot it explodes to 25 percent after a few months. If you go with a card that has a zero percent introductory offer, opt for one with the longest time period—Citi Simplicity and Chase Freedom offer zero percent interest for more than a year and no annual fee.
Getting a trendy card with a big annual fee
One reason everyone seems so hyped up about the Chase Sapphire Reserve is because it offers tons of travel perks, ranging from free TSA PreCheck to 50,000 bonus points worth $750 in free travel. But the big problem with the Reserve is that it encourages you to spend more than you normally would. “Some people get too overextended and then can’t pay off their credit card,” Sabatier says.
For example, you need to spend $4,000 in the first three months to get the initial 50,000 bonus points. That might be doable if you’re planning a big trip, but the card’s value really drops off in the second year when you still have to pay the $450 annual fee to get the $300 travel credit, but don’t get any bonus points to offset the $150 difference.
That means you’d have to spend a minimum of $5,000 (solely on travel and dining)—or up to $15,000 in other charges—on the card just to break even in year two. “Honestly, if you are just starting out, the economics don’t work out,” Sabatier said. “The annual fee on the Reserve pays for itself for higher-end spenders. Besides, there are plenty of other alternatives that don’t have an annual fee.”
Adding someone as an authorized user
When you were in high school, your parents may have made you an authorized user of their credit card. That meant you were able to make purchases with their credit card and they were responsible for the bill. Now that you have your own card, you might think of adding your boyfriend or roommate on there too. Resist that urge.
“First, authorized users are not ultimately liable for the expenses and debts they rack up on a credit card—the primary cardholder is responsible,” cautions Ma. “So if an authorized user purchases a lot on your credit card and doesn't pay you for the expenses incurred, you're ultimately on the hook to pay.”
Using your card on suspicious websites
Credit card identity theft is one of the most common types of scams and it is easy to fall for, especially on sites that look legit. Some scams include fake shopping sites, phishing, where you are contacted by email or text to provide sensitive information, and Facebook scams.
Protect yourself by making sure the website where you enter your credit card number includes “https” instead of “http” in its URL. The https prefix means the site uses an encrypted connection, which protects your credit card information (and anything else you type, including your password) from hackers. Before you enter your digits, always double check the URL to make sure the store name is spelled correctly. It’s easy to fall for what you think is a major retailer like “Target” when the URL is spelled “Targett,” for example. Also, never link over to the store from an email, which could be fraudulent.
Lastly, “You never want to store your card number in the browser either,” Sabatier says. “You also never want to save your card on websites, which is ultimately vulnerable.”
Using your card when you are drunk
Whether you are celebrating a friend’s birthday or drinking on a Tuesday night to avoid writing that term paper, it’s all too easy to buy a round for the house or drink far more than you normally would once you’re feeling tipsy.
One way to avoid drunk spending is to bring cash and leave your plastic at home when you go out. While that seems like sound advice, what if you have an emergency and need more money? That’s where your friends come in handy. And if they’re good friends, they might even buy a round of drinks too.
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