Editorial Policy

4 Things NOT to Do with Your Credit Cards

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By Eva Norlyk Smith, Ph.D.
July 9, 2010

Cash is so wonderfully simple: what you see is what you get. Or rather, what you take out of your wallet is what you spend. When it comes to credit cards, this is not necessarily the case. There are numerous ways that credit card usage can add substantial extra costs to purchases and other charges, often without the cardholder even realizing it. To avoid unnecessary costs, here are 4 things not to do with your credit cards.

1. Avoid taking out frequent cash advances. Credit card cash advances have three costly drawbacks. Firstly, cash advance fees typically run as high as 5 percent of the amount withdrawn. Secondly, the credit card APR for cash advances often are as much as 10 percent higher than the purchase APR. For example, it’s not unusual for the credit card purchase APR to clock in at e.g. 12.99 percent, and the cash advance APR at 23.99 APR. Thirdly, credit card cash advances don’t have a grace period, so those steep cash advance interest charges will begin to accrue from day one.

2. Don’t keep high-APR balances and only pay the minimum. The minimum payment gets applied to pay down the part of your credit card balance with the lowest APR, which means minimum payments make no dent in any high-APR credit card balances on the account. In contrast, under the new credit card rules, card issuers have to apply any monthly payment amount above the minimum towards the balance with the highest APR. In short, paying more than the minimum greatly accelerates the speed with which you will knock down your credit card debt and may dramatically lower interest costs. And obviously, the more paid each month, the greater the interest savings.

3. Don’t take out a 0 APR balance transfer without a payback plan. Offers for 0 APR on purchases or balance transfers may seem like ‘free’ money, but make no mistake, the pied piper eventually has to get paid. Once that lucrative 0 APR intro expires, you’re looking at paying off the loan at interest rates as high as a 20.99 APR variable, so unless you have a payback plan in place, the ‘free’ money from that 0 APR intro offer can quickly grow very expensive. Ideally, put a plan in place to pay off the balance transfer by the time the promotional rate expires. If this is not possible, to avoid being tied down by high interest credit card debt, limit the amount of the balance transfer taken out to what you’re able to pay off within a year after the 0 APR intro offer expires.

4. Avoid making late payments. The new credit card rules stepping into effects late August this year introduce significant curbs on late payment fees, in many cases lowering them to a maximum of $25. So, with late payment fees lower, making late payments is no longer such a big deal, right?

Wrong. With the new credit card rules in place, card issuers are looking for other ways to make up for lost income, and depending on the card issuer, late payments nowadays may trigger all sorts of bad consequences. For example, if you have a 0 APR balance transfer rate on your card, making one late payment, with some card issuers, will cause the 0 APR rate to jump to a penalty rate as high as 29.99 APR. Similarly, the APR on future purchases on the card could jump to the default rate. Making two late payments within a six-month period may also cause you to lose rewards accumulated on the card, or force you to pay a reinstatement fee to get them back.

The bottom line: Credit cards are great, convenient payment instruments. To avoid significant extra costs, however, play by the rules, and avoid using credit cards as an easy source of loan money to make ends meet.