When it comes to managing credit, your habits can affect your finances. Good habits, such as paying bills on time and keeping balances low, can have a positive impact. Bad habits, on the other hand, could lead to increased debt, high-interest rates and other financial issues.
Here are three credit habits you should consider changing:
1. Paying only the minimum amount due
When paying your monthly credit bills, it may be convenient to only submit the minimum amount due. After all, satisfying this requirement will keep your account in good standing and help you avoid late fees.1 The problem is, if you continue this pattern, it will take longer to pay off your debt and you’ll likely pay significantly more in interest.2
For example, most issuers charge up to 3% of an outstanding balance for the minimum due.3 If you have a balance of $500, that would be $15. If you paid the minimum payment each month on that account, it would take you almost three years to pay off the balance with no additional charges. Also, if you’re charged interest on the account, the minimum due could be higher and only a portion of the payment would go toward lowering your balance.
How to break it
In theory, this habit is simple to break - pay more than the minimum amount due each month. Your budget may not allow for a large payment increase, but any additional amount could help you save money on interest, pay off your debt sooner and lower your credit utilization.4 To get started, it might be helpful to pay a little more month by month and increase the additional amount over time.
2. Missing payments
According to a survey by The National Foundation for Credit Counseling (NFCC), 24% of U.S. adults admit to not paying all their bills on time.5 While missing a payment on occasion may not have serious consequences, a string of missed payments could result in accumulating fees, higher interest rates and a lower credit score.6
The standard late fee for missing a credit card payment is approximately $35.7 If you happen to miss three payments, you’ll be charged over $100 in fees. Also, if your account is past due more than 60 days, the issuer can implement a penalty interest rate of up to 29.99% on the existing balance.8 Lastly, payment history is often a significant factor in many of the methods of calculating your credit score.9 If you create a history of missed payments, or one missed payment becomes over 90-120 days late, it may impact your credit score long-term.10
How to break it
If you have a hard time remembering when your payment is due, there are several options to consider. First, set a reminder on your cell phone or personal calendar in advance of the due date. Be certain to give yourself enough time to make your payment prior to the due date. Second, ask your issuer if they offer automatic payments. This could allow you to set a specific date each month when money is withdrawn from your checking account. And finally, if your payments are late due to a lack of available funds, see if your issuer is willing to move your due date to after one of your monthly paydays.
3. Not reading your entire credit card statement
Credit card issuers are required to send you a monthly statement at least 21 days before your next payment is due.11 For some people, these statements can be summed up in two lines: account balance and minimum payment due. However, to fully understand the details of your account activity, it’s important to examine each section of the statement.
Here are a few common sections to highlight:
- Summary of account activity - This snapshot clearly defines key transactions such as: previous balance, available credit, payments, purchases, fees and interest charges. By scanning this data, it’s possible to quickly identify billing errors.
- Transactions - Go through the list of your transactions line by line. Most statements offer data such as transaction date, post date and a description of the transaction or credit. If you see charges that you don’t recognize, this is your chance to dispute them.
- Interest charge calculator - This section lists the interest rates for different types of transactions including purchases, cash advances and balance transfers. It will also list how much you paid during the previous monthly cycle and year-to-date. To ensure your interest rate is true to your original contract, it can be helpful to double check that the rates on the statement match the contract.
- Payment information - As the title states, this section will likely detail the minimum amount due, payment due date and your total new balance. If you plan to schedule a payment or use the postal service, you may want to read the exceptions for certain types of payments. Also, if your due date falls on a weekend or holiday, you may have to consider different options that month to avoid a late payment.
How to break it
To break this habit, there’s only one route to take - read your entire statement from top to bottom. In addition to catching unauthorized charges and billing errors, you could start improving your knowledge of how credit works. To get more familiar with the fundamentals of credit, check out our articles on 10 Common Credit Terms Defined and What You Should Know About Different Types of Credit.
Create new habits
Whether personal or financial, breaking habits can take time and effort. After identifying what you’d like to change, create a plan for action and remind yourself of the benefits along the way. Over time, what was once a bad habit could turn into one of your best.
1. Tsosie, Claire. “What Happens If I Make Only the Minimum Payment on My Credit Card?”. Nerdwallet.com. https://www.nerdwallet.com/blog/credit-cards/minimum-payment-credit-card/ (accessed July 19, 2017).
2. Tsosie, Claire. “What Happens If I Make Only the Minimum Payment on My Credit Card?”. Nerdwallet.com.
3. Konsko, Lindsay. “How Does My Credit Card Issuer Come Up With My Minimum Payment?”. Nerdwallet.com. https://www.nerdwallet.com/blog/credit-cards/credit-card-issuer-minimum-payment/ (accessed July 19, 2017).
4. Tsosie, Claire. “What Happens If I Make Only the Minimum Payment on My Credit Card?”. Nerdwallet.com.
5. The National Foundation for Credit Counseling (NFCC). “The 2015 Consumer Financial Literacy Survey.” NFCC.org. https://www.nfcc.org/wp-content/uploads/2015/04/NFCC_2015_Financial_Literacy_Survey_FINAL.pdf (accessed July 19, 2017).
6. El Issa, Erin. “Americans Not Paying Bills on Time — and Why That’s Bad.” NerdWallet.com.
https://www.nerdwallet.com/blog/finance/paying-bills-time-survey-shows-bad/ (accessed July 19, 2017.)
7. DeNicola, Louis. “What happens if you miss a credit card payment?”. NerdWallet.com.
https://www.creditkarma.com/credit-cards/i/what-happens-if-you-miss-a-credit-card-payment/ (accessed July 19, 2017).
8. Konsko, Lindsay. “5 Times Your Credit Card Issuer Can Raise Your Interest Rate.” NerdWallet.com. https://www.nerdwallet.com/blog/credit-cards/credit-card-issuer-raising-interest-rate-5-times/ (accessed July 19, 2017).
9. Detweiler, Gerri. “Top Late Payment Secrets Revealed.” Credit.com.
https://www.credit.com/credit-reports/late-payment-secrets-revealed/ (accessed July 19, 2017).
10. Detweiler, Gerri. “Top Late Payment Secrets Revealed.” Credit.com.
11. Irby, LaToya. “How to Understand Your Credit Card Billing Statement.” NerdWallet.com.
https://www.thebalance.com/how-to-understand-your-credit-card-billing-statement-960246 (accessed July 20, 2017).