1. Paying your credit card late.

Your payment history has the most significant impact on your credit score. To be exact, it makes up 35% of your credit score. Timely payments help build a positive credit score. Late payments will bring your credit score down.

The more delinquent your credit card becomes, the more it hurts your credit score. A single 30-day late payment won’t hurt your credit score as much as a 90-day late payment. Late payments continue to affect your credit score for seven years, as long they’re included on your credit report. They hurt your credit score less over time as long as you add more positive payment history to your credit report. After seven years, they won’t hurt your credit score at all.

2. Letting your credit card get charged-off.

A credit card gets charged off after 180 days of delinquent payments. Charged-off credit cards are one of the most devastating things that can happen to your credit score. Charge-offs are more difficult to recover from than a single late payment.

3. Having a high or maxed out credit card balance.

Your level of credit card debt is another important factor for your credit score. It’s 30% of your score. Your level of debt compares your credit card balances to your credit limit. The higher your balances are, the more your credit score hurts.

As your credit card balances grow beyond 30% of your credit limit, your credit score will begin to drop. A maxed out credit card can cost hundreds of credit score points, especially if you have a high credit score to begin with.

The good news is that you can recover credit score points lost from a high or maxed out credit card balance by paying the credit card balance below 10% of your credit limit.

4. Applying for too many credit cards at once.

Each time you make an application for credit, an inquiry is placed on your credit report. Inquiries make up 10% of your credit score and can cost 70 to 80 points if you have a credit score in the 700s or 800s. The more credit cards you apply for, the more your credit score will hurt.

When you’re on the market for a new credit card, avoid applying for several credit cards at once. Instead, compare credit card offers and choose one credit card to apply for.

If you’re denied for a credit card, wait before applying for another one. The credit card issuer will send a letter telling you the reasons you were denied. You can use this as an opportunity to repair your credit and improve your chances at getting approved for your next credit card.

5. Opening a new credit card.

Your age of credit is 15% of your credit score. The credit scoring calculation uses the average age of all your credit card accounts. Anytime you open a new account, even a credit card, your average credit age will drop. Opening just one new credit card won’t devastate your credit score. However, the more new credit cards you open, the more your credit score will fall. So, open only one new credit card at a time.

6. Not having a credit card at all.

You can build your credit score without having a credit card, but you’ll be missing out on some credit score points. Ten percent of your credit score considers your mix of credit. That part of the credit score calculation is checking to see if you have experience with different types of credit – both credit cards and loans. Having a credit card and a loan can help you build a better credit score.

7. Closing a credit card

Closing a credit card is more likely to hurt your credit score than to help it. If you close a credit card with a balance, your credit score is going to drop because it looks like you’ve maxed out your credit card. That’s because credit issuers typically report a $0 credit limit on a closed credit card.

Even if the credit card has a $0 balance, closing it could still hurt your credit score depending on the balances on all your other credit cards. When the credit score calculation considers your level of debt, it looks at each credit card individually, then at your total credit cards and credit limits (credit utilization). When you close a credit card, it can drive up your total credit utilization and hurt your credit score.

It’s widely reported that closing an old credit card will hurt your credit score in terms of credit utilization, but that’s not true immediately. The credit bureau will continue to report an account closed in good standing for up to 10 years. It’s only after that point that the credit card will drop off your credit report and potentially hurt your credit score.

Related posts:

1. How to Improve a Bad Credit Score
2. How Credit Cards Impact Your Credit Score

No matter how smart credit card thieves get, it’s important for all cardholders to practice some basic credit card safety habits to avoid credit card fraud.

How to Avoid Credit Card Fraud

Don’t loan your credit card to anyone. First, you can’t be sure they’re only going to charge what they say they will. If they overspend with your credit card, you’re ultimately responsible. Second, no one will be as careful with your credit card as you will. It’s never a good idea to let someone else use your credit card.

Always make sure you get your credit card back from cashiers and waiters. Double check your purse or wallet before you leave the store or wallet to confirm your credit card is back in your possession.

Don’t give your credit card number out over the phone unless you initiated the call to the customer service number listed on the back of your credit card. Some credit card thieves trick you into giving out your credit card number, expiration date, or security code by posing as your credit card company or another business you trust. Avoid giving out your credit card number to anyone who calls saying they’re from your credit card company. Instead, hang up the phone and call your card issuer using the number on the back of your credit card.

Don’t enter your credit card information in any email link. Credit card disguise emails to make them look like they came from your creditor. These emails typically encourage you to visit your card issuer’s website to resolve an issue with your credit card. If you click on the link, the email may look just like the real thing, but it’s probably fake. A credit card thief is simply trying to steal your login information by getting you to login to a fake site. If you suspect something is wrong with your credit card, either call your card issuer’s customer service or visit your card issuer’s real website by typing in the URL yourself.

Report address changes to your credit card issuer immediately. Your credit card billing statements include your credit card number. Not only that, if you order a new credit card and it goes to your old address, the new residents (or anyone else) could use the card. Whenever you move to a new address, let all your current billers know your address is changing. You can file a change of address with the postal service to have all your mail forwarded to your new address.

Never sign a blank credit card receipt. The cashier has the ability to write in any amount and send it through to your credit card issuer. It’d be hard for you to dispute the charge because, after all, the merchant as a copy of the receipt with your signature on it. If you’re given a blank receipt, write in the total amount and draw a line through any blank spaces. Ask for a copy of the receipt for your records, just in case you’re billed for a different amount.

Watch your credit card during transactions. Cashiers sometimes use a credit card skimmer to capture your credit card information. The device can easily be hidden, so if you look away for even a moment, your credit card number, security code, and expiration date can be stolen.

Shred any credit card applications you receive. Don’t simply toss them into the trash because dumpster divers can get them and apply for credit in your name. You should also shred your billing statements before putting them in the trash.

Keep your credit card number hidden when you’re using your card in a public place to keep thieves from taking a picture of your credit card with a camera or camera phone.

Never write your credit card number on the outside of a postcard, envelope, or any other piece of paper that will leave your possession. If there are documents with your credit card number on them inside your home, store them in a safe place, or shred them immediately.

Recovering From Credit Card Fraud

If you think you have been a victim of credit card fraud, contact your credit card issuer immediately. The sooner you let your card issuer know your credit card information has been stolen, the less financial responsibility you’ll have for fraudulent charges.

Monitor your billing statement closely and report any errors as quickly as possible. If you have the ability to check your credit card transactions online, login every few days to make sure no one is using your credit card.

While you still have your credit cards, write down your credit card issuer’s phone number and your card number for each of your credit cards. Store this piece of paper in a safe place and refer to it if your credit cards are ever lost or stolen.

Related posts:

1. How to Respond to Credit Card Fraud
2. 10 Ways to Avoid Credit Card Debt
3. 9 Smart Ways to Use Your Credit Card

Annual Percentage Rate (APR)

The annual percentage rate or APR is the yearly cost of borrowing money using your credit card. The annual percentage rate is also known as the interest rate for your credit card. These days, the average APR for credit cards is around 12.5%. The higher your interest rate, the more you pay when you carry a balance beyond the grace period (more on grace periods below).

Your credit card could have several APRs. One for purchases you make on your credit card, one for balance transfers, and one for cash advances. Read What You Need to Know About Interest Rates for more information about your annual percentage rate.

Grace Period

The grace period is the amount of time you have to pay off balances before you have to pay interest on your purchase. The grace period typically only applies to new purchases made with you begin the billing cycle with a zero balance. You may not receive a grace period for certain types of transactions like cash advances and balance transfers. Instead, interest begins accruing on those balances immediately.

Grace periods are typically between 20 and 25 days depending on your credit card. Ideally, you have a longer grace period, giving you more time to pay your balance without receiving a finance charge.

Finance Charge Calculation Method

Your finance charge is the amount you pay when you carry a credit card balance beyond the grace period. Finance charges are calculated based on your credit card balance and your interest rate using one of several methods.

1. average daily balance method
2. daily balance method
3. ending balance method
4. previous balance method
5. adjusted balance method
6. double billing cycle method

You can learn more about finance charges in the article How Finance Charges Are Calculated and How You Can Avoid Them.

Credit Limit

The credit limit is the maximum amount you can charge on your credit card without receiving a penalty. You may have a different credit limit for purchases and cash advances. The cash advance credit limit is usually lower than the credit limit for purchases. If you exceed your credit limit, your card issuer may charge a over-the-limit fee and raise your interest rate.

Another reason to stay below your credit limit is to protect your credit score. The closer your credit card balance gets to your credit limit, the lower your credit score falls.

Credit Card Fees

Credit cards come with lots of fees and card issuers are continually coming up with more fees. Some typical credit card fees include:

• Late fee is charged when you miss your credit card payment due date or you pay less than the minimum payment. Some credit cards have tiered fees based on your balance. For example, you may pay a $10 late fee if your balance is less than $500 and a $20 late fee is your balance is above $501.
• The annual fee is a yearly fee charged for using your credit card.
• An over-the-limit fee is charged when you exceed your credit limit.
• You will pay a cash advance fee when you make a cash advance with your credit card. The cash advance fee might be a certain percentage of your cash advance, or it could be a flat fee.
• Returned check fee is charged with the check you sent for your payment is returned by your bank. If your check is returned, you might also face a late payment fee and a penalty interest rate increase.

These are not the only fees charged by credit card companies. To find out which fees your credit card charges, refer to your credit card agreement.

Credit Card Rewards

Your credit card may offer rewards as an incentive for using your credit card. Rewards are typically awarded as cash back or points that can be redeemed for discounts, merchandise, or services.

Rewards can be received as frequent flier miles that can be redeemed for airline tickets. Some reward credit cards allow you to accumulate points for a free stay in a hotel. Other cards give a certain percentage of cash back for your purchases.

With reward credit cards, you must be careful about overcharging for the sole purpose of accumulating rewards. It’s also important to know how you accumulate rewards, when they expire, the maximum amount you can accumulate, and the number you need to redeem them. All these factors come into play when you’re using a rewards credit card.

Other Credit Card Benefits

Some credit cards come with other fringe benefits that may be free, but more typically are offered only with credit cards that have an annual fee. These benefits include travel insurance, purchase warranty insurance, and car rental insurance. These insurance benefits are usually only offered when the purchase is made on your credit card.

How to Find Out Credit Card Terms

Most credit card features are included in a disclosure box that’s sent with your credit card application or solicitation. For your existing credit card, information about most features will be included on the back of your credit card statement. Otherwise, refer to your credit card agreement for information about your credit card features.

Related posts:

1. How to Pick the Right Credit Card
2. How Finance Charges Are Calculated and How You Can Avoid Them
3. The 8 Most Important Credit Card Terms

How Credit Card Charge-offs Happen

Late payment entries on your credit report progress in 30-day increments. So, one late payment is 30-days late; two late payments are 60-days late. Once your credit card reaches 180 days late, you’ve missed six credit card payments.

As long as your account is current, credit card companies consider your balance to be an asset to the company. However, when you reach 180 days late, your debt is now considered a liability for your credit card issuer. As an accounting practice, the credit card company writes off your debt on their books and calls it a charge-off.

The charge-off listing is added to your credit report, letting future creditors and lenders know your debt got so late the credit card company had to write it off.

A charge-off is one of the worst things that can appear on your credit report. It will devastate your credit score and can take years to repay.

You Must Pay a Charge-Off

Even though the word “charge-off” sounds like you’ve been forgiven for the debt, that’s not the case. You owe a credit card charge-off just like you owe your current credit card balances. Once your account has been charged-off though, your credit card company may not spend anymore time trying to get you to pay the debt. Instead it will hire a third-party debt collector to work on getting you to pay.

Charge-Off Listings Affect Your Credit Report and Credit Score

A charge-off will remain on your credit report for seven years and 180 days from the time your account first went delinquent. Even if you pay off the charge-off, your credit report will still reflect the fact that your account was once charged-off. The only thing that makes it better is that it becomes a Paid charge-off rather than an unpaid one.

It is difficult to get a charge-off removed from your credit report. You may be able to negotiate with the credit card company to remove the charge-off listing in exchange for payment. But, the credit card company has little incentive to agree to this. Not only that, credit card companies have an agreement with the credit bureaus to provide accurate information about your accounts.

The glimmer of hope is that some consumers have been able to work with their credit card issuers to remove the charge-off if they paid the account. It’s a matter of talking to the right person at the right time.

Settling Charged-Off Credit Card

If you can’t convince the creditor to remove the charge-off, consider negotiating a lower payment amount. This is called “settling your debt.” When you settle a credit card account, your creditor agrees to accept a lower payment to satisfy the debt. From the credit card company’s perspective, something is better than nothing. For you, it means you part with less money than you actually owe.

Be careful about settling a credit card charge-off. Your credit card issuer is required to let the IRS know about any debt above $600 that’s cancelled. In turn, you’re required to report the cancelled debt as income on your next tax return. That could mean you owe taxes or receive a lower refund than you would have otherwise.

If you settle a charge-off, your credit report will be updated to show the account was settled rather than paid in full. This could hurt your credit score as long as it appears on your credit report. Fortunately, the negative entry will fall off after seven years from the date the account was charged off.

Benefits of Paying as Charge-Off

Whether you pay a charge-off in full or you settle the account, you shouldn’t leave the charge-off unpaid. If you don’t pay a charge-off, it can impact your ability to get credit cards and loans in the future. That means you’ll have difficulty purchasing a house or a car. Not only that, you could pay higher insurance rates, be turned down for a job or promotion, and you could even have difficulty renting an apartment.

Once the charge-off is paid, collection efforts on the account will stop. You don’t have to worry about getting calls and letters from debt collectors.

How to Avoid a Credit Card Charge-Off

You can avoid a charge-off by making at least the minimum payment on your credit card each month. Make sure you let your credit card issuer know your current mailing address so you receive your billing statements in time to make your payment. Or, if your credit card issuer has the option, you can sign up for paperless billing.

If you notice you have trouble making your credit card payments, contact your credit card issuer ahead of time. Your card issuer may offer a hardship program that lowers your interest rate or monthly payments to make your payments more affordable. Or, you may take advantage of consumer credit counseling which will help you negotiate a lower interest rate or minimum payment if your card issuer doesn’t have a hardship program.

Avoid using cash advances, balance transfers, and payday loans to pay your credit card bills because create more credit card problems than the charge-off itself.

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Disputing a Credit Card Billing Error

The Fair Credit Billing Act, FCBA, is a Federal law that gives you the right to dispute credit card billing errors with your credit issuer. To exercise your rights, the purchase in question must be for more than $50 and it must have been made in your state or within 100 miles of your current billing address. Before you submit a billing error dispute, first try to settle the issue with the seller.

To dispute a credit card billing error, you must send a letter to your credit card issuer 60 days after the billing statement with the error was mailed to you. The credit card issuer must receive the letter within the 60-day window.

When your letter disputing the billing error, make sure you include your name, credit card account number, the date and amount of the charge you’re disputing, along with a description of your dispute.

Your billing statement typically includes two addresses, one for sending payments, another for correspondence. Send your letter to the address marked for correspondence. Your dispute letter may not be processed if you send it to the payment address. If you can’t locate an address for correspondence, call your card’s customer service and ask for it.

You don’t have to pay the disputed amount while it’s in the dispute process. Your credit card issuer can’t take adverse action against you including charging a late fee, raising your interest rate, or reporting late payments to the credit bureau. The credit card issuer can, however, add a statement to your credit report indicating you have disputed your billing statement. Under the Equal Credit Opportunity Act, other creditors can’t deny credit because you’ve disputed a bill.

Sample Billing Error Dispute Letter

Date

Your Name
Your Address
Your City, State Zip Code

Creditor’s Name
Creditor’s Address
Creditor’s City, State Zip Code

Dear Sir or Madam:

I am writing to dispute an error on my billing statement in the amount of $_______. This amount is incorrect because {give an explanation of why there is an error.}

Please correct this error and any related charges and send a corrected statement to me.

I have included copies of {include a description of any documents you’ve included to prove the disputed item is in error.}

Sincerely,

Your Name

Send your letter via certified mail with return receipt requested so you have proof that the letter was mailed and received within the 60-day window. Keep a copy of the letter for your records. If you send any supporting proof, like receipts or cancelled checks, make sure you send copies and keep the originals for yourself.

What Does Credit Card Issuer Do Next?

Once your credit card issuer receives your billing error dispute letter, they’re required to write back within 30 days letting you know your letter was received. Then, the credit card issuer will do an investigation to determine if the item you’re disputing is actually an error.

The credit card issuer has 90 days to give you a final answer, which could be one of these things. First, your card issuer could correct your bill by removing the charge you disputed and any finance charges or fees associated with the disputed item. Or, they could tell you the bill is correct and let you know why. You’ll be responsible for paying the charge and any finance charges.

Can I Dispute the Error Over the Phone?

You can call your credit card issuer to resolve the error, but to protect your rights under the FCBA, you must follow up in writing. Otherwise, if the dispute time limit passes and your card issuer doesn’t correct the error, you may have no recourse. Your credit card issuer will still be able to charge you for the error. If you refuse you pay, you could be penalized with late charges, an interest rate increase, and a negative credit report entry.

What Types of Errors Can Be Disputed?

There are several different types of errors that can appear on your credit card statement. Here are the ones that are protected by the Fair Credit Billing Act.

• Any unauthorized charges made on your credit card. You could be liable for up to $50 in charges if your credit card was stolen. However, if only your credit card number was used, you will not be liable for anything.
• Any charges that were sent through with the wrong amount.
• Any charges for good or services that weren’t delivered at all, weren’t received as promised, or that you didn’t accept. You cannot dispute credit card charges because of the quality of goods or services received.
• Any math errors, like fees that were added incorrectly.
• Payments, credits, returns that weren’t posted to your account correctly.
• Failure to send billing statements to your current mailing address as long as you sent an update of your address in writing 20 days before the billing period ended.
• Any charges that you’ve asked for an explanation or proof of purchase.

Related posts:

1. How to Handle Credit Report Errors

Credit card minimum payments are typically between 2% to 5% of your credit card balance. On a credit card with a $1,000 balance, your minimum payment will be anywhere from $20 to $50. Even though paying the minimum payment might be convenient, it’s not the best way to pay off your credit cards for several reasons.

Paying the Minimum Takes Longer and Costs More

When you make minimum payments on your credit card, you’re only making small dents in the balance. It’s like moving a mound of sand using only a spoon. It will take a very long time. For example, if you make minimum payments on a $5,000 credit card balance (with an 18% interest rate) it will take you 23 years to pay off your credit card balance.

The reason that minimum payments don’t do much for your credit card balance is because most of the payment goes toward the monthly finance charges. So your balance goes down, very slowly. The higher your balance and interest rate, the longer it takes to pay off your credit card with minimum only payments.

In the 23 years you spend paying off your $5,000 credit card balance, you will end up paying more than $13,000 in total (with an 18% interest rate). That’s more than double the amount of the original balance. You’ll end up paying more than $7,000 in interest alone.

If you doubled your minimum payment and paid $250 toward your credit card balance each month, you’d pay off the balance in 2 years and only pay $989 in interest. You save more than $6,000 sending just $125 more each month. Think of all the things you can do with an extra $6,000.

Your Credit Card Balance Could Go Up

In some situations, your credit card balance could go up instead of down when you’re making minimum only payments. That can happen when you have a high interest rate and a low minimum payment. For example, if you have a $1,000 credit card balance at the default rate of 30% (the rate charged when you make a late payment or exceed your credit limit) and a 2% minimum payment, your finance charge would be $23 while your minimum payment would be $20.

When your minimum payments don’t cover interest, your balance goes up and so does your interest charges. This type of situation makes it impossible to pay off your credit card balance. You must pay more than the minimum to get your credit card balance to go down. Pay attention to your billing statement, especially your finance charge and minimum payment to see if you’re in this minimum payment trap.

Your Credit Score Could Suffer

If your credit card balance is high compared to your credit limit, making minimum payments is probably hurting your credit score. Part of your score is based on your credit utilization, the ratio of your credit card balance to credit limit. Low credit card utilizations are better.

Keeping your balance below 20% of your credit limit is best. If you’ve already exceeded that 20% credit utilization and you’re only making minimum payments on your credit card, it will take a long time for your credit score to recover. In the meantime, you have new applications for credit cards and loans denied because of your high credit card balances and low credit score.

Calculate Your Minimum Payment Timeline

If you want to get a rude awakening about how much minimum payments are costing you, use an online credit card payment calculator. These calculators tell you how much interest you’ll ultimately pay and how long it will take to pay off your balance when you pay the minimum only. You’ll also be able to compare minimum payments to a higher, fixed monthly payment to see how much money and time you’ll save by increasing your monthly payment.

• Bankrate
• CreditCards.com
• Dinktown.com (lets you compare minimum payments on multiple credit cards)

Is It Ever Ok To Pay the Minimum?

You may have an excuse to make minimum payments on your credit card if you’re working on a debt repayment plan where you focus on paying off one credit card at a time. With this type of credit card payoff you send a large, lump sum payment to one of your credit card until that card is completely repaid. Meanwhile, you send the minimum payment to all your other credit cards. Then, once one credit card is repaid, you begin making lump sum payments to another credit card.

Making the minimum payments in this situation is ok because you’re actively working to pay off your credit card debt. In any other situation, minimum only payments will prove to be expensive, time-consuming, and detrimental to your credit health.

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Who Needs a Secured Credit Card?

You might need a secured credit card if you can’t get approved for a traditional credit card. This could be you if you’ve never had a credit card or if you have bad credit. A secured credit card is a good option because it gives you the chance to start building or rebuilding your credit history.

How to Choose a Secured Credit Card

When you’re looking at secured credit cards, you have to choose one the same way you’d choose any other credit card.

What are the fees?

It’s common for secured credit cards to come with additional fees. An application fee and an annual fee are the most typically types of fees. Look at several different secured credit cards and compare the fees between them. If there’s a credit card that has high fees compared to the others, stay away from it. You want as much of your security deposit to go toward your credit limit as possible.

How much of your deposit goes toward your credit limit?

Ideally, you want 100% of your deposit to go toward your credit limit. That means you get a $500 credit limit if you make a $500 deposit. Some credit cards give you as little as 50% of your deposit in available credit. Make sure you know upfront whether you’ll receive your full credit limit or something lower. It’s also worth asking whether your credit limit will increase as you make timely payments on your credit card balance.

How high is the interest rate?

The interest rate is an important factor for any credit card. It determines how much interest you pay when you carry a balance beyond the grace period. You won’t receive the most competitive interest rate on secured credit cards because there’s a certain level of risk associated with borrowers who have bad or no credit history. Still, your interest rate should be comparable to that of other secured credit cards.

Does the credit card issuer report to the credit bureaus?

The secured credit card is pointless if your card issuer doesn’t report your payment history to the credit bureaus. Before you accept a secured credit card confirm that the card will be included on your credit report. Also make sure the account entry won’t reveal that the card is a secured credit card.

Can the card be converted to a non-secured credit card?

Your card issuer may convert your credit card to a non-secured account after a certain number of timely payments. Anywhere between 12 to 24 months is typical for a credit card to be converted, if the card issuer has that service. Otherwise, you can try to apply for a non-secured credit card at another bank after 1-2 years of positive payment history.

Building or Rebuilding Your Credit With a Secured Credit Card

Think of a secured credit card as an opportunity to build a good credit score. Don’t think any less of it because you had to pay a deposit and certainly don’t let that affect your spending habits.

Use your secured credit card to make small purchases each month. Keep your purchases below 20% of your credit limit to show that you’re not taking on more credit card debt than you can handle. Charging only a small amount of your available credit will help build a good credit score.

Pay your balance in full at the end of the month. Not only does this keep you from accumulating more debt than you can repay, it also ensures your payments are on time each month. Your payment history has the most significant impact on your credit score, so take extra steps to make sure your payments reach your creditor on time.

Treat your secured credit card just like a regular credit card. Forget that you made a deposit against the credit limit. Otherwise, you can use that to justify missing your credit card payments. Not only will that hurt your chances at a good credit score, it also means you miss out on some or all of your security deposit. Think of the deposit as money you have in a savings account because ultimately you want to get the money back.

Secured Credit Card Scams

The Federal Trade Commission warns of secured credit card scams that only try to get money from you. Some of these scams convince you to call a 900 number to receive the card. Your phone bill will include a charge for the call and you won’t receive a credit card. A sure sign of a scam is a promise or guarantee or approval or an offer to repair your credit.

To avoid a scam, apply for a secured credit card from a reputable bank. Your bank is a good place to start.

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You may be able to live with credit card debt for awhile, but if you don’t start paying it off soon, the debt may become too much to handle. If you think you can continue making minimum payments on your credit card debt forever, think again. You never know when your credit card issuer will raise your minimum payment, making your credit card payments unaffordable. If that’s not enough to convince you to pay off your credit card debt, here are seven reasons you should pay off credit card debt.

To raise your credit score. A large part of your credit score – 30% to be exact – is based on your credit card debt. The higher your credit card balances are compared to your credit limit, the lower your credit score will be. A low credit score will limit your ability to get approved for new credit cards and loans. It could even cause you to pay higher interest rates on any credit cards and loans you get approved for. As you pay off your credit card debt, your credit score will rise and you’ll begin to see the benefits of having a better credit score.

To avoid paying more interest. There’s a cost to keep a balance on your credit card beyond the grace period. Each month you have a credit card balance, you’ll pay interest charges. The longer it takes you to pay off your credit card debt, the more interest you’ll pay. Of course, paying off credit card debt means you’re no longer padding credit card companies’ pockets with interest payments.

To keep more cash for yourself. Think about how much you’re spending on credit card bills every month? Now imagine being able to keep that money to spend on something for yourself – something you own free and clear, no payment, no interest. Paying off your credit card debt frees up cash that you can start putting toward your retirement, a family vacation, an emergency fund, or a new television. You’ll have to sacrifice some cash in the short term to pay off your credit card debt, but if you think of it as an investment, you’ll realize that you’ll have more money to spend with your credit card debt out of the way.

So you can retire comfortably. Once you retire, the last thing you want to worry about is paying off a ten- or twenty-year old credit card balance. Many retirees have a limited income that barely covers the mortgage and other living expenses. Adding credit card debt makes retirement more difficult, especially if you’re living on a fixed income. When you retire, you’ll want to pay as few bills as possible. Pay off your credit card debt while you’re still gainfully employed and you’ll be able to enjoy your retirement much more.

To reduce the amount of money you owe. As long as you owe money to someone else, they have a certain amount of power over you. Being indebted to someone, especially a large corporation like a credit card company, can be a scary feeling. The sooner you pay off your credit card debt, the sooner you can be free of lenders. You’ll have fewer people sending bills to you every month requesting you send them money.

So you can borrow money for a house, car, or business loan. When you apply for a loan, the bank will look at how much credit card debt you have to gauge whether you’ll be able to make your loan payments. If your credit card debt is too high, the lender will estimate that you won’t be able to handle your loan payments and will probably deny your loan application. Paying off your credit card debt will improve your chances of getting loan approval.

To escape ever-changing credit card terms. As long as you have credit card debt, you’re subject to the credit card issuer’s terms and conditions, which can change at any time. Credit card issuers can raise your interest rate, impose new fees, shorten your grace period, or any number of things that make it more expensive and less convenient to have credit card debt. The only way to escape the credit card issuer’s grasp is to pay off your credit card debt and stay away from credit card debt for good.

Once they’ve repaid their credit card debt, many people swear they’ll never use debt again. You don’t have to go to this extreme to avoid credit card debt. You can continue using credit cards for the protection and convenience, but pay your balance in full each month to avoid the negative side effects of having too much debt. That way you take advantage of credit card benefits without dealing with the costs.

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1. 5 Reasons to Avoid a Credit Card Cash Advance
2. 5 Reasons to Check Your Credit Report
3. 10 Ways to Avoid Credit Card Debt

How Credit Card Debt Settlement Is Supposed to Work

You enroll in a debt settlement program. After you give them details about your credit card debt – which credit card companies you owe and how much you owe – the debt settlement company makes a settlement offer to your creditors. Settlement offers are usually between 10-60% of your total debt.

Ideally, the credit card company agrees to the debt settlement. The debt settlement company sends the money and you never have to worry about that particular credit card debt again.

How Debt Settlement Really Works

For a credit card debt settlement to be successful, there are a couple of prerequisites. First, you need to be able to pay the settlement as soon as the credit card company agrees. Second, you need to be behind on your payments (more on that later).

Depending on the size of your debt, even settling for pennies on the dollar could mean you owe thousands of dollars. If you had that kind of money available, you probably wouldn’t be using debt settlement. The debt settlement company helps you save up to make a settlement offer. Your payments are put into an account until you’ve accumulated enough to approach the credit card company with a settlement offer. The process is repeated for each credit card.

Unfortunately, your payments don’t accumulate as quickly as you’d think. That’s because the debt settlement company takes its fee from the first few payments. So, it could take a few months before your debt settlement savings starts to build.

Debt Settlement Hurts Your Credit Score

Credit card companies rarely (if ever) accept settlement offers on current accounts. Instead, the older your account, the more likely it is that your credit card company accept a settlement. If your accounts are currently all paid up, your debt settlement company will advise you to stop paying your credit cards so they become delinquent.

Each month you miss a credit card payment, it’s included on your credit report. Because your payment history is the most important factor influencing your credit score, those late payments missed payments make your credit score drop.

Missed payments aren’t the only part of debt settlement that hurts your credit score. If you manage to stick with debt settlement long enough to actually settle a debt, the account status will be listed as “Settled” on your credit report. That negative payment status indicates you didn’t fulfill your original payment agreement and will remain on your credit report for seven years.

Collection Calls Will Start

As your account becomes delinquent, you may begin receiving calls from your credit card company demanding payment. When your credit card goes six months past due, it will be charged-off and sent to a collection agency. You still owe the debt and your credit card company will continue to try to get you to pay.

You Could Be Sued

When you fall behind on your credit card payments, your creditor is within its rights to sue you for the debt. Telling your creditor that you’re working with a debt settlement company can speed up the process. A lawsuit could force you to pay the debt in full. If you can’t afford payment, the court may allow the creditor to garnish your wages.

Your Income Taxes May Increase

You may owe income taxes on a debt that’s been settled. The Internal Revenue Service (IRS) requires you to include cancelled debt as taxable income on your income tax return. If the cancelled debt as $600 or more, your credit card issuer is required to send you a Form 1099-C that lists the amount of debt that’s been cancelled. This form has also been sent to the IRS, so they’re aware that you should report this debt on your tax return.

The cancelled debt could decrease the amount of your tax refund if you’re due one. Worse, you could end up having to pay more taxes to the IRS.

Credit Card Debt Settlement May Not Work

In the end, debt settlement may not even work for you. There’s no guarantee that your creditors will accept a settlement offer. Actually, it could take up to a year or two before you have enough money in your settlement account to settle your first debt. After sending payments for months and seeing no results, a lot of people give up on debt settlement services.

Is Credit Card Debt Settlement Ever Right?

There may be some exceptional circumstances that make debt settlement right for you. For example, if your debts are unsecured, already charged off, and you can’t file Chapter 7 bankruptcy because you make too much money, debt settlement may be an alternative to Chapter 13 bankruptcy which requires to pay all or some of your debt within 5 years.

If you decide to settle your debts, it may be cheaper to work directly with your credit card company rather than hire a debt settlement firm and pay their hefty fees.

Related posts:

1. 8 Signs You Have Too Much Credit Card Debt
2. 7 Reasons to Pay Off Credit Card Debt
3. Dealing With Credit Card Debt Collectors

While there isn’t an obvious, in-your-face type of way to tell whether you have too much credit card debt, there are some signs to let you know it’s time to change your credit card spending habits. Think about how you’re currently using your credit cards as you read through this list. If any of these things apply, you may be in trouble with credit card debt.

1. Your debt-to-income ratio is high.

Numbers don’t lie. Your debt-to-income ratio indicates the amount of your monthly income that goes toward credit card debt payments. To figure out your debt-to-income ratio add up the amount you spend each month on credit card payments and divide it by your monthly income. If the number is above 10%, then you have too much credit card debt.

2. You always make the minimum credit card payment.

Making the minimum payment lengthens the amount of time it takes to pay off your credit card debt. Not only that, it increases the amount of interest you ultimately pay. If you can only afford to pay the minimum amount due on your credit cards, then you have too much credit card debt. To raise your monthly payment amount, you’ll have to cut back in other places. That way, you can afford to pay off your credit cards and get rid of credit card debt.

3. You frequently use balance transfers to avoid making credit card payments.

Balance transfers are a good way to take advantage of better credit card terms, like a lower interest rate. However, they’re not designed to help you skip out on your credit card payments. If you’re transferring credit card balances to keep from having to make a payment on your credit card, you probably have too much debt. And if you don’t already have more debt than you can handle, you will soon as the balance transfer fees make your credit card balances go up

4. One or more of your credit cards is maxed out.

Maxing out your credit card happens when you charge your credit to the maximum credit card limit. This is never a good idea because it hurts your credit score. Not only that, maxed out credit card balances are more difficult to repay. Several maxed out credit cards are surely a sign that you have too much credit card debt. The only good thing about a maxed out credit card is that your balance can’t go any higher, so you won’t continue to loan yourself with more debt than you can handle.

5. You’ve been turned down a loan because your credit card balances are too high.

Banks don’t want to loan money to you if you have too much credit card debt because, chances are, you won’t be able to repay what you’ve borrowed. The bank may not immediately tell you you’ve been turned down because you have too much credit card debt. Instead, they’re required to send you a letter letting you know the reason you’ve been turned down. If the letter indicates you were denied because your credit card balances are too high, there you have it.

6. You don’t know how much credit card debt you have.

As their credit card balances rise out of control, many people go into denial about how much credit card debt they have. If you avoid adding up your credit card balances because you’re afraid of the truth, there’s a good chance you have more credit card debt than you can handle. But, when it comes to credit card debt, ignorance is not bliss. The sooner you face your true credit card debt, the better.

7. You can’t afford to pay your balance in full every month.

The best way to avoid credit card debt is to pay off your credit card balances every month. That way, you never have to deal with credit card debt. If your balances are too high to pay off every month, you have too much credit card debt. When you make credit card purchases, remember to keep them at a level that you can easily repay when your credit card statement that comes. That way, you avoid the lingering balance that can become credit card debt.

8. You lie to friends, family, and your spouse about how much you’re spending with your credit cards.

People with credit card debt not only lie to themselves, they also lie to the people around them about how much credit card debt they have. If you find yourself taking extreme measures to keep people from finding out about your credit card habits, you may have too much credit card debt.

Facing Your Credit Card Debt

The first step to dealing with credit card debt is acknowledging that you have it. Sit down and add up your credit card balances, so you know how much debt you actually have. Then, make the decision to stop using your credit cards. That way your credit card debt won’t keep going up. Finally, start paying back your credit card debt. You may have to reduce your spending in other areas, but it’s worth it if it means you’ll finally be rid of credit card debt.

Related posts:

1. 7 Reasons to Pay Off Credit Card Debt
2. The Harsh Truth About Credit Card Debt Settlement
3. 10 Ways to Avoid Credit Card Debt