Don’t kill your credit by making some of the most common credit card mistakes numerous consumers make.
On one hand, if you are trying to establish credit, you may want to open a credit card to build your score. Donovan Fox, Corporate Spokesperson for Navy Federal Credit Union ($47 billion, Vienna, VA) discusses the power of proper credit card use. “Using a credit card properly has a direct impact on your credit score,” he explains. “Utilizing your card regularly, paying on time, and keeping your account balances low relative to you credit lines, i.e., keeping your account under 25% utilized, increases your credit score and shows lenders you are able to manage credit properly and responsibly.”
However, problems can occur when the consumer begins to open and close (or forget about) about a bevy of credit cards they’ve opened.
Before you make any moves, stop and evaluate your situation. Examine which credit cards you currently have in your possession--if necessary go through that junk drawer to find cards you opened simply to obtain a “10% discount” at the register too.
Once you have all your cards in hand, determine what you owe on each card. If you haven’t used the card in months or even years, contact the customer service number on the back of the card and speak to someone about your account. You’ll need a detailed estimate of what exactly you owe.
Obtaining a running balance of all cards is also a good idea in order to catch and prevent credit card fraud. Question any balance that seems suspicious. If you haven’t used your card in months, but have a substantial balance request further research as your account may have been hacked.
After you’ve tallied up your debt start paying down the balances. However, experts agree that paying the minimum is never a good idea. Why? Many regular credit cards have an interest rate of 18% or higher, which means you end up pay considerably more than if you paid off as much as you could at once. Note--federally chartered credit union credit card interest rates are capped at a 18%, unlike some big banks that can charge 30% or more.
Why You Shouldn’t Haphazardly Open and Close Credit Card Accounts
Problems can arise when consumers open too many credit cards. “Opening numerous accounts can negatively impact your score because excessive inquires for credit can send the wrong signals to financial institutions,” Fox explains. “Some consumers have a hard time managing multiple cards, which can impact their credit score negatively.”
Fox adds that consumers need to understand the consequences of opening and closing too many credit card accounts. “One of the key attributes to the credit score is ‘average age of accounts,’ so by regularly opening new lines, you're consistently lowering this number - negatively impacting your score. Instead of closing cards, pay them down and leave them open with a zero balance. This will increase the average age of lines over time, as well as lower your overall credit utilization, which both improve your score.”
Instead of erratically opening and closing accounts, consider using each card from time to time instead of throwing them in the junk drawer. Remember, if your account lies dormant your lender may charge an inactivity fee. For example, Fifth Third Bank charges a $19 fee--just because you haven’t used your card once during the year.
In addition to occasional card use, Fox suggests that members turn to their credit union for assistance with managing credit. “Organizationally, we believe it is important to find ways to help our members move forward financially. One of the ways the credit union is doing this is by offering a wide range of products with low rates relative to other issuers.”
He says that a product that is regularly utilized by those attempting to build or repair their credit is Navy Federal’s nRewards secured card - in 2011 named one of the best secured programs in the industry by Credit.com. “Secured cards are available to anyone that has the funds available to hold, regardless of credit experience,” he says. “Navy Federal's secured card program offers an excellent way to safely and responsibly build or repair credit.”
Confused about what to do with your bevy of credit cards? Interested in increasing your credit score? Find a credit union and get the ball rolling with financial educational assistance.