Informed consumers avoid pitfalls of plastic and build their credit
By Taylor Rao
Albany Times Union
Published 4:04 pm, Friday, January 25, 2016
When managing your personal finances at a time when the spending seems endless, it's common to swipe your credit card at the checkout counter while looking the other way. You're at the register holding a sweater you already own, but love so much you just have to have it in a second color.
On the way home from the store, you might find yourself justifying the purchase without having the cash on-hand — dreaming up a way to find the funds when the statement arrives at the end of the month.
And while myths circulate about credit card debt, extra fees and personal security, some consumers might decide against using credit cards altogether.
"While it's possible to live without a credit card, people are not protecting or helping their credit scores by not borrowing or charging anything," says Kevin Gallegos, credit and debt expert for Freedom Financial Network in Phoenix.
Credit agencies rely on past payment history to gauge how borrowers will do in the future, and for consumers who choose not to borrow at all, securing a personal loan or a mortgage can be difficult down the line.
Instead of avoiding credit cards, smart consumers create a strategy to own a credit card and use it as a tool to their advantage, rather than making excuses for losing track of purchases and payments, creating a path for excess borrowing and debt.
Starting fresh, however, doesn't come easily until you can acknowledge your current credit card habits and understand the mistakes you've made in the past.
We've outlined the top mistakes consumers with credit cards make — and offer suggestions on how to fix them.
You believe what you hear.
Many consumers are discouraged by credit cards based on the myths — but it's a mistake to avoid credit cards altogether out of fear of earning a bad credit score, racking up debt or believing you'll pay unnecessary fees with no rewards.
Narrow down some of the key components of a credit card that are important to you, keeping in mind the overall best options for a card like low interest or no annual fees. Then, depending on your lifestyle, check out benefits or rewards that fit. Credit card companies offer specific cards for students, for purchasing gasoline, opportunities to earn cash back or don't tack on for international fees.
Don't wait to apply for your first card. Instead, create a plan to use the card responsibly and to your advantage.
"The best use of credit cards is to build a credit history," says Steve Bouchey, president of Bouchey Financial Services in Troy. "So when it comes to getting your first card, the younger the better for disciplined users."
At 16 years old, you can apply for a credit card with a cosigner and begin charging small purchases to be paid off by the end of the month. It's an opportunity for parents to teach children accountability for the purchases they make, while building up a positive credit history at a young age.
You don't research.
While it's appealing to choose a credit card based on the rewards — such as the opportunity to earn cash back or accumulate hotel points or airline miles — it's easy to get caught up on perks you might never use. The airline credit card might seem appealing when you're 30,000 miles up in the air, but post-landing you may realize you're an infrequent flyer who could never rack up the miles to earn a free flight.
Consider your current lifestyle, spending habits and financial situation as you read the fine print before applying for a credit card. What to look for: APR, details about benefits like points and miles, annual fees and penalty fees.
You only make the minimum payments.
A common mistake is to tell yourself you'll only use your credit card for bigger, more expensive purchases. Experts say no matter the size of the purchase, never charge something to your credit card you can't afford to pay off by the end of the month.
"People with excellent credit almost always keep low balances on their cards," says Kari Luckett, credit card expert at CompareCards.com.
You don't use technology to monitor your account.
If you don't keep an organized history of your credit card purchases, it's easy to fall behind on payments or put your financial security at risk. By using your bank's mobile app to frequently check your accounts, you can report any suspicious activity right away or utilize features like auto pay to stay up-to-date on all of your payments. When you travel, make it a priority to alert your bank of travel destination and length of your stay.
You don't check your credit report.
Checking your credit report is smart for a number of reasons — but it's one way to find out how many cards are still open under your name that you might have forgotten about over time. And if you're not sure how to check your credit report, everyone in the U.S. can access their credit report once a year for free from all three credit bureaus on www.consumer.ftc.gov.
This helps consumers catch errors quickly, and allows them to enjoy watching the progress of their financial efforts, says Trae Bodge, a retail expert working with the American Bankers Association.
You buy for the sake of buying.
With a credit card just a reach away, you might find yourself buying things you don't need. The relief you feel at the checkout counter knowing the cash won't instantly be coming out of your account catches up when the bill arrives and buyer's remorse sets in. Put some thought into your credit card purchases before you buy.
"Commit to paying off a purchase over a minimal number of billing cycles, with one being the ideal," says Bodge. "If you can't commit to that, the purchase you want to make might not be within your budget at the time."
You constantly open and close cards.
Some consumers believe to scale back financially, they must close out their current card and apply for a new one when the situation improves. Closing cards, however, doesn't give lenders the impression that you're avoiding the temptation to spend by living more simply.
"Think twice about canceling a credit card with a long, positive history," says Gallegos. "The longer you hold a card, the more valuable it is in your credit score determination."