Published November 01, 2012
Credit card missteps that hurt you
Credit cards can be a great tool for earning money back on purchases, scoring merchant discounts and qualifying for added perks and benefits in many product categories. But plastic lovers must always remember to tread carefully.
When leveraged incorrectly, some spending strategies can easily work against you and your wallet. The trouble starts when consumers stop looking at the big picture.
"Strategies go off the rails or fail when people only look at the short-term benefits," says Bruce McClary, spokesman for Richmond, Va.-based ClearPoint Credit Counseling Solutions. "You need to look out on the horizon to determine if it is truly worth it."
You also need to ignore flashy marketing materials and focus on the fine print.
"Reading the terms and conditions is key," so you adequately understand the payment method you are using, says Laura Creamer, financial education specialist with nonprofit credit counseling organization CredAbility in Atlanta.
To spare you some missteps, here are four credit card strategies that can easily work against you and some specific tips on how to keep them from backfiring.
Opening a card just to get a sign-on bonus
Sky-high sign-on bonuses have become a popular way for issuers to woo new cardholders. But many consumers don't realize these bonuses are often attached to spending thresholds, McClary says. This means you'll only earn the bonus points, miles or cash back after ringing up a certain amount in purchases on your credit card.
Some of these thresholds are reasonable. For example, one card company is running a promotion on a card that awards cardholders with 25,000 bonus points after the first purchase. Others have much larger price tags to obtain bonus points.
"A lot of credit card companies are making rewards harder to get," Creamer says.
McClary says you don't want rewards points to alter your spending habits. For example, forgo the bonus points if a bonus requires $3,000 in charges within the first three months of opening an account and you normally wouldn't spend that much, he says.
Opening and closing card accounts to avoid fees
Big sign-on bonuses are often attached to credit cards with higher annual fees. As an added incentive to get you to apply, issuers will waive these fees for the first year. But it's not a good idea to try to game the system by opening the account to get the bonus, then closing it before the annual fee cycle starts. This strategy can actually do some damage to your credit score.
"You're affecting the length of your credit history" because an account that's been open fewer than 12 months will drive down the average age of all the credit lines on your credit report, which is one of the components of your credit score, CredAbility's Creamer says. Your score also can suffer since each application will generate a credit inquiry, which can cost you three to five points apiece.
There's also no guarantee you'll ultimately avoid the charge because you will have to pay the annual fee if it is imposed before you remember to close the account.
To avoid any undue damage to your credit score, only opt for a credit card if the annual fee is in your price range. If you do aim too high or mistakenly incur an exorbitant charge, Creamer suggests asking your issuer to waive the fee so you can keep the card open longer.
"Oftentimes, they will, especially if you've had a decent history with them," she says.
Bouncing balances from one card to another
Balance transfer offers, which allow consumers to move existing balances onto a new credit card at a low or 0% introductory annual percentage rate, or APR, can certainly be helpful to someone looking to pay down debt. However, McClary says consumers need to make sure they understand an offer's terms and conditions.
"There's a ticking clock that starts once you make the transfer," he says, explaining that many offers feature retroactive interest on whatever balance you fail to pay down in the specified time frame. "All that interest is going to be heaped on there."
If that happens, cardholders may be inclined to bounce the balance onto another credit card with a low introductory APR. This can generate an unnecessarily high number of credit card inquiries that can negatively impact your score. It can also provide debt-ridden consumers with a false sense of security regarding their financial status.
"Don't fool yourself into thinking you've done something to pay (the debt) off," Creamer says. Instead, pick one solid balance-transfer card to move the debt to, and focus on your budget to make sure you pay off the balance on time.
Opening a store card to get a discount
Retailers have long offered big discounts at the point of sale if a customer opts to sign up for that store's credit card at the register. The truth is, taking a clerk up on this offer can leave you with a heavy liability.
"These cards have very high interest rates," Creamer says, which will easily negate any deal you may have been given, if you carry a balance. They also feature very low credit limits and typically only can be used at that particular retail chain. The limitations don't justify the ding an inquiry will make to your credit.
Creamer says it's a good idea to skip the store credit card and opt for a more traditional product that provides flexible spending and is more likely to bolster a credit score.
If you do frequent a particular retailer, ClearPoint's McClary suggests asking if the store offers a co-branded card backed by a traditional issuer or bank. These products offer mainstream acceptance and often feature more favorable terms and conditions.
For instance, one credit card works as a normal card but comes with nice perks: It carries a 13.24% APR, charges no annual fee and lets cardholders earn three points per dollar spent on purchases from Amazon.com.