7 Dangerous Assumptions You Should Not Make When Using a Credit Card
Written by
Gabrielle Olya
Edited by
Molly Sullivan
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Using a credit card is something many Americans do on a regular basis. According to the latest data from the Federal Reserve, 82% of U.S. adults have a credit card, and according to FICO, nearly half the U.S. population (46%) opened at least one new account over the past year.
Although credit card use is common, many Americans don’t really know all the ins and outs of how they work. Here are some of the dangerous assumptions you should not make when using a credit card.
It’s Best To Close a Credit Card If You Aren’t Using It
There are many reasons you may no longer use a credit card. Perhaps you opened a store credit card and find you don’t really shop there anymore, or maybe you opened a card with better perks and you no longer need your older one for everyday purchases. Your instinct might be to close your unused card out, but this is a mistake.
“Closing a credit card decreases available credit and also erases some history from your credit report,” said Michael Sullivan, a personal finance consultant at Take Charge America, a nonprofit credit counseling agency. “Both of these harm your credit score. Unless a card has an annual fee, the best solution for an unused card is to cut it up.”
The Best Time To Pay a Credit Card Bill Is on Its Due Date
You might assume that the due date is the best time to pay a credit card bill, but this isn’t necessarily the case.
“It is never good to be late with a payment, but there are many times when it is smart to make a payment before the due date,” Sullivan said. “Sometimes it can free up needed credit, but it always improves credit scores by lowering credit utilization.”
Sullivan said that some consumers go so far as to make a payment after every use to make sure the balance doesn’t grow out of control, while also maximizing their credit scores.
“They are really paying cash for each purchase while still getting the benefits of a credit card, such as warranties, the convenience of not carrying cash and credit card rewards,” he said.
All Credit Card Reward Programs Are About the Same
Not all credit card reward structures are the same, so it’s worth to do some shopping around before deciding on the card that’s best for you. In general, Sullivan believes you should opt for a cash-back card versus one that offers points.
“Rewards points have only the value that the credit card company assigns,” he said. “Travel points often become devalued as airlines increase mileage or point requirements. Points also need to accumulate over time to enable major purchases or trips. In the interim, many things can happen.”
Cash-back cards, on the other hand, provide more flexibility.
“Cash can be used for any trip or any purchase,” Sullivan said. “But all cash-back cards are not created equal. Some provide a flat percentage on all purchases, while others offer more for gasoline purchases, groceries or other categories.
“A highly organized consumer can use one card for gasoline and a different card for groceries, or just use one card and plan to balance out returns,” he continued. “In any case, consumers should get a cash-back card and have the rewards applied or refunded monthly.”
It’s OK To Pay Credit Card Bills Late
When money is short, you might assume that credit card payments are the bills to pay late, since one missed payment does not generate much harassment.
“Credit card companies may not mind a missed payment, but it is because they collect a significant fee,” Sullivan said. “In addition to the high interest, most companies charge $35 or more for missing a payment. In addition, they notify the credit reporting agencies of the missed payment after 30 days, and that notice will affect the consumer’s credit score for 84 months.”
It is often less costly to miss a payment with a lender that does not report late payments.
“Many small companies, utilities and public services do not report,” Sullivan said.
Credit Cards Should Be Used for Emergencies
When an unexpected expense pops up, you might think that using a credit card is your best bet since you don’t have to pay it off right away. However, this is likely not the best option.
“While a credit card can be helpful in emergencies, this shouldn’t be your go-to protection,” said Andrea Woroch, consumer finance expert and writer for CardRates.com. “You should have an emergency fund with three to six months of living expenses to avoid using a credit card and digging yourself into debt.”
Having Credit Card Debt Is OK
Nearly half of all American households (46%) have credit card debt, according to the latest available data from the Federal Reserve Bank of St. Louis. While having credit card debt is “normal,” this does not mean it’s OK.
“Debt is stealing from your future,” said Jay Zigmont, Ph.D., CFP, founder of Childfree Trust. “Credit cards are some of the highest interest debt out there. If you carry a balance on your credit card, you are effectively paying 20% to 30% more each year for each thing you buy. Try to pay off your credit cards completely each month, and don’t carry debt.”
You Can Pay Off Credit Cards Making the Minimum Monthly Payments
Some Americans believe they are using their credit cards responsibly if they are able to make the minimum monthly payment on time every month. However, you should be aiming to pay your bill in full each month.
“If you pay just the monthly minimum payments, it may take you 10 years or more to pay it off,” Zigmont said. “In some cases you aren’t even covering the interest. Credit card companies love when you make minimum payments because it maximizes how much interest they can get from you over years.”
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