5 risks of using credit cards - and how you can avoid running into them

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5 risks of using credit cards - and how you can avoid running into them


Credit cards are bouncing back.

Recent data from the Federal Reserve Bank of New York showed that Americans are opening more credit card accounts, a trend that's been on the rise since the 2007-08 global financial crisis.

After the recession, the number of credit card accounts dropped drastically from a pre-recession high of 496 million in 2008 to 380 million by the end of 2010.

However, as of the end of June 2016, Americans have over 440 million credit card accounts, and if the trend continues, it may soon surpass that pre-recession high.

What's triggering the increase?

Experts speculate that consumers may be becoming more comfortable with the cost of borrowing than they were during -- and in the immediate aftermath -- of the financial crisis.

It also doesn't hurt that credit card providers are offering a lot of rewards and sign-up bonuses for new customers, increasing the appeal of opening new credit card accounts.

For example, the Chase Freedom Unlimited®, which offers 1.5 percent unlimited cash back on all purchases, offers a $150 bonus after you spend $500 on purchases in the first three months from account opening.

The Bank of America® Cash Rewards credit card offers a $150 online cash rewards bonus after you spend $500 within 90 days of opening your account.

Credit cards can provide great perks and serve as tools for helping you build credit.

But there are also some risks involved in using them, and if you're not careful, your credit could end up taking a hit.

Here are five risks in taking out credit cards, and tips on how to manage them.

1. Building up more debt than you can afford

A credit limit should be thought of as a loan extended to you by a credit card provider, as opposed to free money to spend.

If your card's credit limit is $2,000, this doesn't mean you should plan on spending $2,000 that month, unless you can pay it off in full.

Even if you can repay your balance in full, your credit score may take a hit if you use a high percentage of your limit. Experts recommend that you keep your utilization across your credit cards' total limits to under 30 percent.

The takeaway? Be mindful of your spending, and make sure you're not buying more than you can afford. Consider creating a monthly budget and figuring out how much you can afford to spend each month -- and then try not to exceed this.

Some tools that can help you track your spending include Mint, You Need a Budget or Credit Karma's My Spending tool. Or there's always the option of creating a simple spreadsheet or list of your monthly expenses.

2. Missing payments could lower your credit score.

Your payment history is one of the biggest factors that contributes to your credit score, so missing payments can have a serious impact on your credit.

If you miss a payment, you'll typically be charged a late fee and a penalty APR may be applied to your account.

Your late payment may be reported to the three major credit bureaus if it's more than 30 days late. And this could stay on your credit report for up to seven years.

One way to potentially avoid this is by setting up automatic payments. This way, you won't have to worry about possibly forgetting to pay your bill (although remember - you'll be responsible for ensuring there's enough in your account when the automatic payment is withdrawn from your account).

You could also set up text or email reminders for when your monthly bill is almost due.

3. Carrying a balance could cause you to incur heavy interest charges.

If you carry a balance over to the next month, you could end up paying a significant amount of interest.

Credit card interest rates can vary depending on the card and your creditworthiness, but they can run high.

As of August 12, the average credit card APR, or annual percentage rate, (based on the 100 most popular credit cards in the U.S.) was just over 15 percent. However, if you have average or poor credit, you'll likely pay an even higher rate.

If you're carrying a high balance and having trouble paying it down, one option you may consider is applying for a balance transfer card. Some balance transfer cards offer a 0 percent introductory period for anywhere between nine and 21 months, meaning you won't pay interest on your balance during that time.

The best way to avoid having to pay interest? Try to pay your credit card statement balance in full every month.

4. Applying for a new credit card could result in a small hit to your credit score.

When you apply for a credit card, a hard inquiry generally takes place -- meaning that a credit card issuer checks your credit report, and this check subsequently shows up on your credit report.

A hard inquiry can lower your credit score by a few points, this effect should decrease or even disappear over time.

That said, you shouldn't generally let this worry you if there's a specific credit card you're looking to get. Rather, you may want to avoid applying excessively for credit cards or for cards you don't actually need.

You may also want to avoid cards you're unlikely to be approved for. Credit Karma's Approval Odds uses nationwide credit card data to predict your chances of being approved for a credit card, so consider checking this before applying for a card.

5. Using too much of your credit could negatively affect your credit score.

Credit card utilization refers to how much of your available credit limit you use on a monthly basis. Utilization rate is an important indicator of lending risk, because a person who reaches or exceeds his or her credit limit is more likely to have trouble repaying the money than someone with a lower utilization rate.

A good rule of thumb is to keep your credit utilization under 30 percent. If your credit utilization is higher than you'd like, consider asking your credit card provider for a credit limit increase (which is at your provider's discretion and may involve them making a hard inquiry if they check your credit).

Bottom line

Though there are risks to using credit cards, you can minimize their impact by following some basic principles. As with using any form of credit, it's best to avoid complacency and maintain a sense of discipline -- you might find a little can go a long way for your credit score.

About the Author: Mika Bhatia is a Staff Writer for Credit Karma. She's worked in financial services and tech, and has now found the perfect union of the two at Credit Karma. When she's not busy coming up with credit-related analogies, she's most likely supporting the Warriors, enjoying a fine cup of British tea or doing yoga (goal: completing a headstand without toppling over). Follow her at @MikaBhatia!

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Great content!...I have used all the above tips and recommendations since 2013 to rebuild my credit. Using a Captial One secured credit card responsibily for 18 months ( no late or missed payments and keeping my credit utilization between 10% and 20%) I was apprved for a Capital One Quicksilver card with a $5,000 credit limit. 

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