Credit Card Do’s and Don’ts

#5: Call your creditors to negotiate lower APR

Unlike fixed-rate loans, most credit cards come with variable interest rates that can change over time. This means that as the Federal Reserve adjusts the prime rate, your credit card’s APR can fluctuate as well. Although fixed-rate credit cards do exist, they’re quite rare.

The upside to having a variable APR is that it isn’t set in stone — it can actually work in your favor if you know how to negotiate.

If your credit score has improved since you first opened your account, or if market rates have dropped, you have a strong basis for requesting a lower APR. The process is simpler than you might think:

1. First, review your current interest rate and compare it with current market rates. If you find that your rate is higher than what’s available for similar credit products, prepare to make your case.
2. Gather your recent credit score details, any offers from competing credit card companies, and a clear idea of what rate you’re aiming for.
3. Now it’s time to pick up the phone and call your credit card issuer’s customer service department. Explain that you’ve noticed improvements in your credit score and that you’re aware that market rates have declined. Let them know you’re considering your options and would prefer to continue as a loyal customer if they can offer you a more competitive rate.

Many issuers are willing to negotiate a lower interest rate, especially if you’ve demonstrated responsible credit behavior over time. You should do this regularly, particularly if your credit score has improved since you opened the account.

#6: Only get credit cards when you have a strategic use for them

Credit cards can be a valuable financial tool if used wisely, offering convenience, rewards, and a way to build your credit. That’s why it’s important to only open a new account when you have a specific, strategic purpose in mind.

Before applying for a credit card, take a close look at your spending habits. For example, if you travel frequently, a travel rewards credit card might be the best choice for you. These cards often offer perks like airline miles, hotel discounts, and other travel-related benefits that can save you money on your trips.

Many credit cards provide bonus points or cashback on certain categories, which can effectively lower your everyday expenses.

Credit cards are most beneficial when they align with your lifestyle. Rather than opening multiple accounts just for the sake of having credit, choose a card that complements your habits and helps you work toward your financial goals.

#7: Keep your accounts open and in good standing

Credit age is a key factor used to calculate your credit score — it reflects how long you’ve had your credit accounts open and in good standing. In simple terms, if you consistently make your payments on time and maintain your accounts without issues, you’re building a solid credit history. Lenders see this as a sign that you’re experienced and reliable when it comes to managing credit.

The longer your accounts have been active, the more your credit age can work in your favor. This is because a lengthy history of responsible credit management shows potential lenders that you know how to handle debt over time.

When you open a new account, think of it as starting a timer on a valuable asset. Keeping that account open, even if you don’t use it frequently, can help boost your credit score by extending your credit age. If you no longer need a particular account, consider keeping it open rather than closing it immediately. You might even look for another purpose for it so that it continues to contribute positively to your credit history.

#8: Use your lowest APR credit card for big purchases

When planning a big-ticket purchase that you expect to pay off over several billing cycles, it’s important to choose the right credit card.

While rewards credit cards can be attractive for their points and cashback benefits, they’re best suited for purchases that you can pay off in full each month. If you carry a balance, the interest charges can quickly add up — often within just one or two billing cycles — erasing any rewards benefits you might earn.

For larger purchases that you know will take time to repay, opting for a credit card with the lowest APR is usually a smarter choice. A lower APR means that you’ll incur less interest on the amount you owe, reducing the overall cost of the purchase over time. By minimizing interest costs, you’re essentially saving money, which can make a big difference when dealing with major expenses

#9: Keep your payments around 10% of your income

A good rule of thumb is to keep your total monthly credit card payments at or below about 10% of your take-home pay. Your take-home income is the money you receive after taxes and other deductions, so it’s the actual amount you have available to cover your expenses.

If you’re already struggling to meet the minimum payments across all your cards and they add up to more than 10% of your income, it’s a clear sign that your credit card spending is too high relative to what you earn.

When your credit card payments start eating up a large portion of your income, it not only makes it harder to save money and cover everyday expenses but also increases your financial vulnerability in case of unexpected costs. It’s important to take a step back and evaluate your spending habits.

Sometimes, small changes like reducing discretionary spending can free up enough cash to bring your payments back under that 10% threshold.

If after reviewing your budget you find that your credit card payments are still too high, it may be time to seek debt relief. This could mean reaching out to a financial counselor or exploring debt consolidation.

#10: Use credit card reward programs to your advantage

Reward programs are one of the best advantages you get from using credit cards. Cash back, free gas, airline miles, and point reward programs are just some of the perks you can earn. And once you get used to using credit, strategically using rewards can help you save money.

Say, for instance, you have a card that offers 3% cash back on groceries. You can use the card to make all grocery purchases throughout the month. Then you use the income you would have spent on groceries to pay the bill in-full. You earn 3% and use your credit card interest-free.

Maximize these types of rewards by:

Choosing cards that align with your spending habits

Using your card for routine expenses

Paying balances in full each month

Taking advantage of sign-up bonuses

Monitoring reward expirations

#11: Take advantage of extras, like credit score tracking

Many credit cards offer additional features beyond rewards programs, such as fraud prevention services and credit score tracking. Taking advantage of these services can provide significant benefits.

For instance, credit monitoring services typically cost around $20 per month, but some credit cards offer this feature at no extra charge. Complimentary credit score tracking allows you to stay informed about your credit health without having to pay extra.

Beyond credit score monitoring, credit cards often include real-time alerts for suspicious transactions, the ability to freeze or lock your card instantly if it’s lost or stolen, and zero-liability policies that protect you from unauthorized charges.

#12: Understand cosigning before you get into it

This tip is especially important for college students. If you’re under 18 then you can’t get a credit card without a cosigner unless you’re emancipated and employed. But most college students don’t really understand how cosigning works.

A co-signer is responsible for the debt if you don’t pay, but they usually can’t make charges on the account. This is different from an authorized user or a co-applicant on the account. An authorized user can use the account to make charges, but they aren’t responsible for the debt. Co-applicants mean both people can use the account and both people are responsible for the debt.

If parents cosign so a minor can get an account, the account holder still needs to use the account responsibly! If you don’t make the payments and it goes to collections, cosigners get the calls, too.

#13: Eliminate credit card debt before you apply for loans

Credit card debt can easily mess up loan approvals. When applying for a loan, lenders assess your financial health by examining your debt-to-income (DTI) ratio. This ratio compares your total monthly debt payments to your gross monthly income, providing insight into your ability to manage additional debt.

A lower DTI ratio suggests better financial stability, increasing the likelihood of loan approval. Most lenders prefer a DTI ratio below 36% (the highest they’ll accept is usually around 43%). That number includes the potential new loan payment. Exceeding this limit may result in loan denial.

Reducing existing debt before applying for a loan can improve your DTI ratio, enhance your credit score, and improve your chance of getting approved.

To effectively lower your DTI ratio, you should:

1. Increase income: Boosting your income through a new job, pay raise, or side hustle can positively impact your DTI ratio.
2. Avoid new debt: Refrain from making additional credit charges before applying for a loan, as new debt can negatively affect your DTI ratio.

#14: Learn about debt consolidation before you need it

Debt consolidation takes multiple debts of the same type and rolls them into one low-interest monthly payment. Credit card debt consolidation can be extremely useful if you have multiple balances that you need to pay off.

Consolidating at the right time helps you avoid debt problems that can lead to financial hardship and bankruptcy.

The trouble is that most people don’t know about options for consolidation before they need them. As a result, you end up scrambling to find solutions when you’re financially stressed. So, research options first to understand when to use things like balance transfers and consolidation loans to your advantage.

#15: Know when it’s time to seek professional help

One of the biggest mistakes that people make with credit cards is being stubborn about asking for help. You see your bills getting higher, but you procrastinate and avoid asking for professional assistance.

The problem with this is that the longer you wait, the fewer options you may have available.

Consumer credit counseling is designed to help people facing credit card debt problems. Credit counselors are certified professionals that understand all the options available to eliminate debt quickly. They can guide you towards repayment solutions, as well as negotiate on your behalf to reduce interest rates so you can make a real dent in your debt load.

Don’t be shy about calling a certified credit counselor like the ones at Consolidated Credit for help today!

15 Credit Card Don’ts

#1: Don’t run up your balances to the limit

Keeping a low credit utilization ratio keeps your credit score healthy, so don’t max out your cards! Credit utilization is the percentage of your available credit that you’re currently using. For example, if you have a credit card with a $10,000 limit, it’s advisable to keep your balance below $3,000 to maintain a utilization rate under 30%.

Maxing out your credit cards, or using a significant portion of your available credit, can negatively impact your credit score and may signal to lenders that you’re overextended financially.

To effectively manage your credit utilization, try…

1. Paying down balances early: Making payments before your statement closing date can reduce the reported balance.
2. Decreasing spending: Limiting credit card purchases helps prevent high balances and keeps your utilization ratio in check.

Increasing credit limits: Requesting a higher credit limit from your issuer can improve your utilization ratio, but this doesn’t mean you should spend more! Continue to pay down your existing balance.

#2: Don’t use reward credit cards when you can’t pay off the balance quickly

Everyone loves earning rewards, but sometimes we’re not smart about it. If you carry a balance and incur high-interest charges, the cost can quickly outweigh the benefits.

For instance, if you earn 1.5% cash back on a purchase but you pay 20% APR over several billing cycles, the interest costs more than the rewards earned. You don’t earn anything except extra debt.

Use rewards credit cards only when you can pay off the balance in full each billing cycle. This approach allows you to enjoy the rewards without incurring interest charges that negate their value.

By using the appropriate card for each type of purchase, you can boost your rewards without changing your spending. However, always make sure that your spending remains within your budget to avoid digging yourself deeper into debt. Remember, the key to benefiting from reward credit cards lies in disciplined usage and paying balances in full and on time.

#3: Never use credit as a substitute for income

This is a huge mistake with credit cards that will put you on a slow road to financial distress. If you use credit to cover daily expenses because you don’t have funds, you’re only covering up the problem. And, in reality, you’re making it worse.

Credit cards are revolving debt, which means the minimum payment requirement increase with your balances. As you charge daily expenses, your credit card bills increase, leaving less cash flow. That means you’ll need to make more charges to cover next month’s expenses. It’s a downward spiral that usually ends up in bankruptcy court.

If you see this happening, stop charging and make a budget. If you can’t find a way to balance your budget, talk to a certified credit counselor.

#4: Don’t miss a payment by more than 30 days

You should always make every effort to pay your bill on time to avoid late fees. However, if all else fails, make sure to pay before your next bill is due. If you don’t pay within 30 days of the due date, you technically miss the payment. This results in the credit issuer reporting the missed payment to the credit bureaus.

Missed payments appear on your credit report and stay there for seven years.

Timely credit card payments are essential to maintain a healthy credit score and avoid other problems. Here’s what you need to know:

Consequences of late payments

• Late fees: Missing a payment can result in fees — the more times you miss, the bigger the cost.
• Higher interest rates: Late payments may trigger a penalty APR, which can increase the cost of carrying a balance.
• Credit score impact: Payments more than 30 days late can be reported to credit bureaus, remaining on your credit report for up to seven years and negatively affecting your credit score.

Once you miss a payment, you have 6 months before the creditor moves the account to charge-off status and closes it.

#5: Avoid cash advances

A cash advance allows you to withdraw cash using your credit card, effectively borrowing against your credit limit. This process differs significantly from using a debit card at an ATM, where funds are drawn directly from your bank account. While cash advances can provide quick access to cash, they come with substantial costs and should generally be avoided.

Cash advances typically carry higher Annual Percentage Rates (APRs) compared to regular purchases. Also, unlike regular purchases that often have a grace period before interest begins to accrue, cash advances start accumulating interest immediately upon withdrawal.

Most credit card issuers charge fees on cash advances, typically ranging from 3% to 5% of the amount withdrawn, or a flat fee, whichever is greater.

Cash advances do not qualify for rewards, cash-back programs, or any other credit card benefits.

#6: Don’t apply for too many new credit cards in a 6-month period

Each time you apply for a credit card, you authorize a credit check that creates a hard inquiry on your credit report. While these inquiries remain on your report for up to two years, they typically affect your FICO Score for only 12 months.

A hard inquiry occurs when a financial institution checks your credit report to evaluate your creditworthiness for new credit applications.

Each hard inquiry may cause a slight, temporary drop in your credit score, often less than five points. However, multiple hard inquiries within a short period can lead to a bigger hit.

Avoid submitting multiple credit applications in a short timeframe to prevent significant impacts on your credit score. Instead, try pre-approval or pre-qualification offers, which involve soft inquiries that do not affect your credit score.

#7: Never open an account just because you received an offer

Credit card offers are endless, even when your credit score isn’t the best. When you have good credit, the offers pour in. But just because you receive an offer in the mail, it doesn’t mean you need to open a new account.

If you receive a credit card offer that piques your interest, go online to research the card. You can also compare it to other similar cards to make sure you get the best deal. Make sure you need the card and can afford to add this bill as an additional expense to your budget. Then, and only then, should you open a new account.

#8: Don’t close old accounts

Maintaining long-standing credit card accounts can help boost your credit score. Credit age is not the biggest factor used in scoring, but it does count. So, closing your old accounts decreases your credit age and may also decrease your score.

Closing a credit card reduces your total available credit, which can increase your credit utilization ratio if you carry balances on other cards. A higher credit utilization ratio may negatively impact your credit score.

Long-standing accounts contribute positively to your credit history length. Closing an old account, especially the one that’s been open the longest, can decrease the average age of your accounts, potentially affecting your score.

Here’s how to manage unused accounts:

• Use occasionally: If you have old accounts that are rarely used, consider making small purchases periodically. This keeps the account active and may help maintain your credit score.
• Negotiate terms: If high annual fees are a concern, contact the card issuer to negotiate a waiver or reduction. This allows you to keep the account open without incurring unnecessary costs.
• Evaluate necessity: If an account has high fees and doesn’t offer significant benefits, it might be worth considering closure. However, weigh the potential impact on your credit score before making this decision.

Before closing any credit card account, assess how it aligns with your financial goals and its potential impact on your credit profile. In many cases, keeping old accounts open and managing them responsibly can contribute positively to your credit health.

#9: Don’t let accounts close due to inactivity

As we’ve discussed, old accounts in good standing are good for your credit. But if you don’t use a credit card, the creditor may close it for you. They’ll usually notify you before it happens. But ideally, you want to avoid your account being closed — as well as the warning — entirely.

It’s important to note that a closed account in good standing drops off your credit report after about 10 years. So, the decrease in your score may not happen immediately. But it could come at a time when you want your score to be as high as possible. So, it’s best to keep your accounts open to avoid this type of senseless damage.

#10: Don’t ignore fraud protection calls

Credit card fraud protection is offered by many credit card issuers to safeguard consumers against unauthorized transactions. Understanding how these protections work can help you respond effectively if fraudulent activity occurs on your account.

When suspicious activity is detected on your credit card account, issuers often initiate fraud alerts to confirm if you were the one responsible for specific transactions. These alerts may come in various forms, including automated phone calls, text messages, or emails.

If you do get a call, don’t hang up! It’s essential to respond right away, as timely verification can prevent further unauthorized charges.

If you notice any unauthorized transactions or suspect your card information has been compromised, contact your card issuer immediately. Most issuers provide 24/7 customer service dedicated to handling fraud cases. Then request that a fraud alert be placed on your credit report. This notifies potential creditors to take extra steps in verifying your identity before extending credit.

If you report the loss or theft of your credit card within two business days, your maximum liability is $50. Failing to report within this timeframe can increase your liability, but many issuers offer zero-liability policies, meaning you won’t be responsible for unauthorized charges regardless of when you report them.

#11: Don’t carry balances from month to month

Some people think that it’s bad for your credit score to pay off your balances in-full. They believe you need to carry balances over from month to month to maintain good credit. This is a myth.

Credit utilization is better when it’s lower. Anything higher than 30% is bad for your credit, but you don’t get penalized for going lower than 30%. So, pay off balances quickly and try to keep them at zero to maximize your score and avoid debt problems.

#12: Never take on more credit than you can afford to pay back

Credit should not be used to make ends meet when you don’t have enough income. If you can’t afford your bills now, you won’t be able to afford another bill for debt repayment.

Always make sure you can afford debt payments before you take on new credit. As far as loans go, lenders will help ensure you can afford the payments by checking your debt-to-income ratio. However, you don’t have the same safeguard with a credit card. You can get a new card and run up thousands of dollars in debt, which could put you in a situation where you can’t afford your bills.

If you’re going to make a big purchase or series of charges, you should check to see how much it will increase your bills first. Then adjust your budget so you’re not adding expenses you can’t afford down the road.

#13: Don’t hide from your creditors if you’re having trouble

You shouldn’t treat your creditors like debt collectors. People hide from collection agencies to avoid harassment and demands for payment. So, if you fall behind on your credit card payments, you may be inclined to do the same to your creditors. Don’t!

Credit issuers generally want to help when you run into trouble. They don’t want your account to be charged-off or discharged for less than the full amount you owe. They also want to keep you as a loyal, active customer. This means credit card issuers are often willing to work with you.

Initiate contact: Reach out to your credit card issuer to request a reduction in your interest rate. If you’ve paid on time in the past, they might accommodate your request.

Assess your financial situation: Be prepared to discuss your current financial situation. Create a detailed budget that outlines your income, expenses, and existing debts. This will help you determine a realistic monthly payment amount.

Propose a plan: Propose a structured repayment plan based on your budget. Many creditors are open to negotiating terms that make repayment more manageable for you.

If you can’t afford to pay your bills and creditors start to call, pick up the phone and ask them to help you find a solution. They may even offer forbearance, where they suspend your payments until you can catch up.

#14: Don’t assume a certain debt solution will fix your problem

Every financial situation is different and there are a variety of debt solutions available. Which one you need depends on your debt, credit and budget.

Don’t assume that a solution that worked for a family member or friend will work for you. You need to find the best debt solution for your unique financial situation.

Of course, knowing which solution that is can be tough, especially if you’ve never faced debt problems before. Most people don’t hear anything about debt solutions until they need them. If you hear about a solution that worked for someone else, research it thoroughly and talk to a professional to make sure it will work for you, too.

#15: Don’t settle debt before researching all your options

Debt settlement is a powerful debt relief tool that can help you avoid bankruptcy. This option is not for everyone. In fact, you should only consider it if you owe several thousands of dollars and your debt consists of either personal loans, payday loans, or balances owed on repossessed vehicles. Student loans and tax debt can sometimes be settled, but only under specific circumstances.

The debt settlement process involves negotiating with creditors, lenders, collection agencies, or even law firms in order to repay a lower amount than what was originally owed. You can either enroll in a debt settlement program or negotiate settlements on your own. Keep in mind:

1. Each debt you settle will impact your credit. You create a negative item in your credit report that sticks around for seven years. However, after you settle major debts, you can eventually bring your credit score back up to where it was — and even higher, considering your debt will be resolved.
2. Settlement is not instant. You must set aside money every month to generate your settlement offers. This can take up to 48 months and you still make monthly payments during that time.

Settlement is a viable option in certain situations. If your debts are already in collections and you’re drowning in debt, you may choose to settle regardless of the temporary credit hit. Research your options, and consider working with debt settlement professionals who can guide you through the process.