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Having a credit card can help build credit, offer rewards that can be cashed in for travel, and provide smaller perks like car rental insurance and travel accident insurance. But a credit card can quickly become a burden on your personal finances if not handled properly.
Try to avoid these five credit card mistakes for the sake of your financial health.
Carrying a balance
“A credit card can be the best lending deal on the planet,” says John Barnes, a certified financial planner in Andover, Massachusetts. “Where else can you obtain an interest-free loan for 30 days?” But if you don’t pay off your entire balance every month—after the grace period—your credit card quickly turns into a recurring nightmare.
Consider this: The average debt for households with rolling balances is a whopping $16,048, according to ValuePenguin. Add 13% to 22% interest, which is the average range credit card interest rates these days, and that $16,000 is going to balloon fast. The value of any rewards that you may have earned on that card will be negated by the interest. And you’ll spend countless nights worrying about paying it off. Don’t do it.
A close second of absolute credit card no-no’s is sending in a payment late. Doing so consistently is even worse. First, you end up paying late fees, which can run from a maximum of $27 for first-time offenders to as much as $38 for repeat offenders. (Sometimes if you call the card issuer, they’ll waive the fee as a courtesy, especially if you’re a long-standing customer in good stead.)
Any payment is money down the drain. But then comes the lasting damage. Even a single missed payment delivers a hit to your credit score. The delinquency stays on your credit history for a full seven years (although the damage to your score will taper over time). A lowered score can, of course, make it harder to qualify for other loans, or to get the best terms for the loan even if you are approved. Getting a cash advance
Need quick cash? You may be tempted to turn to your credit card for an advance. Don’t, says credit expert John Ulzheimer. “They’re terrible, a horrible idea all around,” he says. Generally, the interest rate is markedly higher than what your credit card charges for regular purchases. Second, for advances, there is no grace period as with regular credit card transactions. The interest on the advance accrues immediately after you withdraw the money, and it then compounds--meaning you pay interest on the interest as well as the principal--until you pay off the advance. Finally, after getting a cash advance, you could be considered riskier by your own credit card issuer, which may reduce your credit limit, suspend the line, or close the account altogether to compensate for the extra risk, says Ulzheimer. Closing your cards
Maybe you’ve decided you have too many credit cards or it’s silly to let some just collect dust. It might seem sensible, then, to simply close some of them. “Not so fast!” says Malik Lee, the president of Henssler Financial in Kennesaw, Georgia. The average length of your credit history with various cards and loans accounts for 15% of your total credit score, he notes, with longer being better in the eyes of the scoring agencies. Thus, he says, “closing out a card that has a long history can be a big mistake.”
Your open cards help your credit score in another way. Their credit limits increase your total available credit, which can help to reduce your overall utilization rate. That’s the percentage of available credit that you use. The lower the percentage, the better for your credit score.
Co-signing a credit card
Share a house, share a car or share a bed. But don’t share your credit card account. Co-signing a credit card means that both parties are legally responsible for paying the balance, but there’s no recourse for one party if the other one bails. That person is stuck with the bill. Even if the other person is your spouse, consider keeping credit card accounts separate, which can be a blessing if the marriage unravels. If you’re both on the account, the credit card company will come after both of you no matter what your divorce papers say. “It’s much easier to divorce your spouse than your credit card issuer,” says Ulzheimer.
As an alternative, add a spouse, child or other person close to you as an authorized user, rather than a co-signor. That way, they get their own card and enjoy the credit-building benefits from having a credit card, but you remain in control of the account. If things go awry, you can remove the authorized user at any time without needing their permission.
This content originally appeared on ValuePenguin.