Though credit cards can have a net positive effect on your finances, they also leave the door open for trouble. Between hidden fees and their complex rules, if you aren't careful around your little piece of plastic, it can end up costing your dearly. We outlined the four worst things people can do with their credit cards, and why they should be avoided.
Taking out a cash advance. When you buy items with a credit card, you are given a grace period those things off. During this time, you will not be charged any interest. Cash advances don't play by those same rules. When you use your credit card to take out money at an ATM, you begin accumulating interest the moment you get cash-in-hand. Not only that, but you will also have to pay a cash advance fee of around 5%.
Let's take a look at how much that will cost you, even if you pay it off after a month. Assume you take out $1,000 with a cash advance with an APR of 25% and a fee of 5%. Right off the bat, the cash advance fee costs you $50. Then, after 31 days you will be stuck with roughly $23 in interest charges. Together, the one-month cost of getting the $1,000 on hand would come out to $73. If you think that 25% interest rate is high, know that it's a fairly typical cash advance APR.
Becoming 60+ days overdue on your bill. If you're late paying your credit card bill, the consequences can be mild or annoying. Some cards even provide cardholders with late fee forgiveness. In most cases, missing the due date can cost you around $35. However, if you miss two consecutive credit card payments, the penalties typically ramp up to overdrive.
The first problem you'll face is a penalty APR. Many credit card contracts feature a special interest rate reserved for individuals who commit an infringement. A penalty APR can kick-in even after one late payment. However, once you are 60 days or more overdue, the interest rate can be applied to your current outstanding balance. That will ramp up your interest charges and quickly burn a hole in your pocket.
Secondly, once you have missed two payments, issuers are very likely to report you to the credit bureaus. Being 60 days delinquent on your credit card bill can seriously damage your credit score.
Making minimum payments. If you stick to making just the minimum payments, get ready not get rid of your balance for a very long time. Let's look at a concrete example to see exactly how devastating minimum payments can be. Assume we are dealing with average credit card debt and APR. With just minimum payments, it would take about 28 years to completely pay back the balance.
One of the worst myths surrounding credit cards is that minimum payments are designed to help consumers. From the example outlined above, it's easy to see how untrue that is. Minimum payments maximize the interest you'll pay.
Canceling an old account. Average age of credit (AAoC) makes up about 15% of your total FICO 8 score. Older accounts are what is chiefly driving your AAoC up. Shutting one down will cause your AAoC and your credit score down.
If the account has any fees associated with it, cancelling may be a good idea. After all, your credit score will eventually bounce back. You don't want to be stuck paying an annual fee indefinitely. However, if the credit card is not costing you anything, you shouldn't cancel. There is no reason to hurt your AAoC by closing down an account that's not currently having any adverse effects on your credit score.