Credit Cards

5 Tasks for Your Year-End Credit Card Checklist

Posted on by Dalia Ramirez

December is an ideal time to make sure you’re maximizing any credit card benefits that may reset or expire at the end of the year. This is especially true if you’re paying for those benefits through an annual fee. It’s also a good time to review your spending habits to make sure the card you’re using is right for you.

Here’s an end-of-year checklist that can help ensure you’re getting the most out of your credit card.

1. Use your credits

Some credit cards offer statement credits for certain types of spending throughout the year, but terms and expiration dates tend to apply. If it’s a recurring credit, it’s often a use-it-or-lose-it perk, meaning you can’t roll over any unused amount to the next month or year.

If the recurring benefit is awarded annually, it’s also important to know whether it resets each calendar year, or on every cardholder anniversary, the month or date you opened the account. Either way, aim to make your purchase a few days before that date so that it posts to your statement on time. Pending charges that officially post afterward may not qualify.

And as with any credit card benefit, don’t overspend on goods or services you don’t want or need just to get a small discount.

Types of common credits include:

  • General travel purchases: Many rewards cards offer travel credits to offset eligible travel purchases at airlines, hotels, cruise lines and car rental agencies.
  • Airline incidentals: If you’re traveling over the holidays, you can typically apply airline incidental credits to checked baggage, seat upgrades, and in-flight purchases like food and beverages.
  • Streaming: Credits for streaming services like Netflix and Spotify have become commonplace. Often, these are distributed on a monthly basis. “We pay for Hulu, HBO Max and Paramount Plus using the streaming credits on our card,” said Deb Toner, a resident of Albuquerque, New Mexico, who works in the TV and movie industry. “Because of the cost of annual fees, I want to make sure I get every single penny out of it.”
  • Lifestyle: This may include credits for food delivery services, fitness subscriptions or rideshare services.
  • Miscellaneous: Your card may even offer credits at specific department stores, online retailers or subscriptions.

2. Maximize any bonuses linked to spending

Some airline and hotel cards offer benefits like upgraded loyalty status or free night certificates once you spend a certain amount per year on your card. If you’re close to a bonus spending threshold, ask yourself if the benefit would provide enough value to warrant additional spending on the card before the end of the year. If so, you might want to prioritize hitting that target.

But you’ll want to have a plan for using the loyalty status or the free-night certificates before you chase them.

3. Review free trials that may be expiring

Many credit cards offer free introductory trials for premium subscription services at food delivery or rideshare companies. Even if your trial doesn’t expire at the end of the year, now would be a good time to review the promotion terms and — if you’re not interested in keeping the service — set a calendar reminder to cancel it before you’re charged for another year.

And of course, free trial or not, the end of the year is also a good time to review the services you’re already paying for, to make sure they’re still worth it.

4. Consider dusting off unused credit cards

If you stuck your credit card into a sock drawer to avoid the temptation to overspend with it, you may be better off keeping it there. But be aware that many issuers will automatically close credit cards that have been inactive for an extended period, and that closure can come with consequences.

That’s because two big factors that affect your credit scores are credit utilization and length of credit history, and an account closure can negatively impact both.

Credit utilization is the percentage of your available credit that you’re using, and ideally you want to keep that figure low. Losing a line of credit might make that harder to do. “If closing a credit card removes some of the available credit and makes the revolving utilization increase, it could result in a loss of points” from your scores, said Tom Quinn, vice president of FICO Scores, in an email.

And an account closure may also drag down the length of your credit history, depending on how old that account is.

“Bottom line — there is no FICO score benefit associated with closing a revolving account,” Quinn said.

5. Look behind to plan ahead

As the year draws to a close, review your spending habits to see where your money is going. Your credit card statement will make this process fairly easy.

Maybe the amount you’re spending has increased in certain categories, like travel or grocery stores. If so, it might be time to look for a different card that can increase your cash back or travel rewards. Or perhaps you have some big expenses coming up early next year that could be put on a new card to earn a lucrative bonus.

Identifying your habits and shifting your spending to the right credit card could pay dividends in the new year.

Craig Joseph writes for NerdWallet. Email: cjoseph@nerdwallet.com.

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Credit Card Debt Is Making a Comeback

Posted on by Anna Helhoski

Credit card debt took a nosedive in the early days of the pandemic in 2020 as consumers stayed home, lost work and received cash infusions from the government.

Two years later, it’s back.

Credit card debt increased 15% year over year — the largest one-year increase in more than two decades, according to the Federal Reserve Bank of New York’s quarterly report on household debt and credit released today. Its total of $930 billion is near pre-pandemic levels.

The report found one group of consumers has surpassed its debt average since December 2019, before the pandemic: those in the lowest income areas. Meanwhile, consumers who live in high-income areas have average balances that are $300 lower than in December 2019.

Credit card debt has been rising all year, according to the New York Fed, and its researchers chalk up the increases to a few possibilities:

  • Consumers are no longer putting off “services” purchases like vacations and travel.
  • Higher prices of goods and services because of inflation.
  • People aren’t slowing consumption of goods and services despite inflation.

New York Fed researchers say they expect to see credit card debt increase as it usually does heading into the holidays.

Debt is up, but delinquencies are down

Debt is higher than pre-pandemic levels, according to the New York Fed’s report. It increased by $351 billion, or 2.2%, in the third quarter of 2022 and now sits $2.36 trillion higher than at the end of 2019.

That’s good news for lenders and less of a celebration for consumers. What consumers can rally around is a lack of a significant uptick in delinquencies, which remain below historical trends, the report found. Researchers at the New York Fed largely chalk that up to excess savings still bolstering some borrowers. The percentage of consumers with debt in collections still remains lower than pre-pandemic levels.

Here’s what’s happening with other types of debt, according to the New York Fed’s findings:

  • Mortgages make up 71% of all outstanding household debt balances compared with 69% in 2019. New York Fed researchers say the refinancing boom in housing is over because of increasing interest rates, and what is left are purchases. New mortgage originations have slowed to pre-pandemic levels. Total mortgage debt is $11.67 trillion.
  • Student loans — the majority of which are federal loans that have been paused since March 2020 — saw slight balance declines likely due to discharges through existing loan forgiveness programs such as Public Service Loan Forgiveness. The pause is expected to lift next year. Total student debt stands at $1.57 trillion.
  • Auto loan balances continued to increase in the third quarter on a consistent 11-year upward trend, but the number of originations (i.e., cars being bought) has decreased since the previous quarter. New York Fed researchers say those who may be struggling likely bought a car recently, and the price would have been inflated compared with that of past years. Younger borrowers, ages 18 to 29, are struggling most with auto loan payments. Total auto loan debt is $1.52 trillion.
  • Home equity line of credit, or HELOC, balances increased for the second consecutive quarter after years of decline. Total HELOC debt is $322 billion.

Anna Helhoski writes for NerdWallet.

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8 Times You’re Using the Wrong Credit Card

Posted on by Jae Bratton

There’s no such thing as a universal best credit card. The right card for you depends on your lifestyle, your goals and your credit history. For instance, if you’re looking for travel rewards but your friend is building credit, the best card for each of you will differ greatly.

And while there may not be one best card for you — the average American has about three cards, according to a 2021 Experian study — there are many times a card can be wrong for a specific situation.

Here are eight times you could be using the wrong credit card, and what you can do instead.

1. You’re still using your starter credit card

You may have started out by building your credit with a secured card, student card or alternative card, but once your credit is in better shape, it may be time to upgrade.

If you’ve used a starter card responsibly by keeping your utilization rate low and paying balances in full every month, you may qualify for a card that’s a better fit now. A different card could offer a higher credit limit, better rewards earnings, and perks like cell phone protection and travel benefits. Some card issuers may automatically upgrade your card once you’ve reached certain thresholds, while others may not. Contact the issuer to check your options.

2. You’re not using a card enough to earn the sign-up bonus

New cardholders can often earn a lucrative welcome bonus, but usually with a caveat: You have to spend a minimum amount within a specific time frame to get it. Note the spending requirements for a card’s sign-up bonus, and use the new credit card enough by the deadline. If you continue to pay with an older credit card that’s already in your wallet, you risk missing out on the bonus if you don’t spend enough on your new card.

A little planning can help. Think about any upcoming big purchases you need to make, such as a car repair or a new laptop. Just one of those could be enough to hit the bonus’s spending requirements.

3. You’re using a store-specific card

It’s true a store credit card can save you money, especially if you are a frequent, heavy spender at that store. However, the rewards earned with a store credit card are often only redeemable at that store, limiting their usefulness.

Most shoppers would be better off using a general rewards credit card and earning more flexible rewards. Some cards have elevated rates for online shopping purchases while others earn as much as 5% back at popular merchants like Target, Walmart and Amazon.

4. You didn’t realize 5% cards take extra work

Several cards boast a top 5% cash-back rate in popular spending categories like grocery stores, restaurants and gas. The catch, though, is that you’ll have to do some work to earn that rate. In most cases, you’ll need to track categories: Qualifying 5% purchases may rotate quarterly, or you may have to choose your own categories. If you’re spending outside of those categories with this card, you’ll likely earn a paltry 1% instead of the juicy 5% you think you’re earning.

Most times, you’ll have to activate the bonus categories before the issuer’s deadline to earn the 5%, even if you’re spending in the right category. Plus, you’ll likely run into spending caps in those 5% bonus categories; once you hit those caps, the rewards rate drops to 1%. For those who find a 5% card to be high maintenance, opt for one that earns a flat 2% cash back on every purchase instead.

5. You mix up the card names

According to a 2020 NerdWallet study, 14% of Americans view credit cards as “complicated,” and it’s not hard to see why. Some issuers offer suites of cards in the same family and have names that are nearly identical. The logos of some issuers are strikingly similar, too. Perform a quick audit of your credit cards to make sure that they are the cards you intended to get. Cards that look and sound nearly the same may be worlds apart in terms of fees and rewards structure.

6. You’re regularly using a balance transfer card for purchases

Balance transfer cards can be excellent tools for paying off debt. They consolidate several debts into one place, making them easier to keep up with, and they can give you a breather on interest for many months. However, if you’re using a balance transfer card for everyday expenses too, it will be hard to whittle that balance down to $0. Plus, many balance transfer cards don’t come with rewards. Leave the balance transfer card at home but take the cash-back card with you — and be sure to make regular payments toward both.

7. You aren’t using the right card for that purchase

It pays to know the rewards rates for all of your credit cards. Say you have two credit cards, one that earns 4% on gas and another that earns only 1%. Using the 4% card whenever you fill up would return $30 more if you spent $1,000 annually on gas. That $30 may not seem like a lot, but small amounts add up, especially if you have multiple rewards credit cards. To help keep track of different rewards rates, you could label your cards with sticky notes or keep a small reference guide in your wallet.

Often you’ll have to keep spending caps in mind, too. Issuers typically cap earnings on their highest rewards rates after you reach a certain amount of spending in a particular category. Make sure you track your progress toward that cap and switch to another card with a better rate when you reach it — until the limit resets.

8. You’re not using a credit card at all

Though they may look and feel virtually the same, a debit card is very different than a credit card. Credit cards offer protections and perks that debit cards (and cash) do not. You can earn cash back and other rewards with credit cards that you won’t get with debit, and it’s often easier to recover from losing a credit card than a wallet full of cash. More importantly, responsible credit card use builds your credit score, which can translate into more favorable loan terms and insurance rates, among other money-saving benefits.

Jae Bratton writes for NerdWallet.

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3 Common Credit Myths That Could Damage Your Score

Posted on by Erin El Issa

Financial misinformation is rampant, and it could be hurting your credit score. A new NerdWallet survey finds that Americans hold many misconceptions about their credit, some of which could seriously damage their scores. Here are three common credit score myths and how to guard against them.

Myth 1. Leaving a balance on your credit card is good for your score

This is a sticky credit myth: Nearly half of Americans (46%) think leaving a balance on their credit card is better for their score than paying it in full, according to the survey. But carrying a balance doesn’t help your credit and can, in fact, be harmful if the balance is a large percentage of your available credit limit. That’s because it increases your credit utilization (the amount of your credit limit in use), which significantly influences your score.

Another drawback of leaving a balance on your credit card is the interest expense. Credit card debt — which you have if you leave a balance on your card, even if intentionally — is one of the most expensive types of debt due to double-digit interest rates. And while you might think leaving a small balance on your card wouldn’t be that costly, it can be because of how credit card interest is calculated.

If you don’t pay off your entire balance by the due date, interest is assessed, but not just on the remaining balance. Instead, it’s calculated on the average daily balance on your credit card. So if you leave a $10 balance on your credit card, but the average daily balance on your card over the month was $1,000, interest is charged on the $1,000 balance.

You can combat this by paying off your balance on or before the due date, which may lower your credit utilization and monthly costs.

Myth 2. Closing a credit card you don’t use is good for your credit

The survey found that close to half of Americans (46%) think closing a credit card they no longer use can help their credit score. Keeping a financial product you aren’t using seems counterintuitive, but closing a credit card can damage your score.

Closing a card may ding your credit score in two ways: increasing your credit utilization and decreasing the average age of your accounts. And while there are reasons to close a credit card account, generally, disuse isn’t enough of a reason to take the credit hit.

Even if you don’t cancel your credit card, the issuer will eventually close any account that’s not used over a certain period. To combat this, you can charge a small recurring expense — like a monthly subscription — to the card and set up autopay to wipe out the credit card balance each month.

Myth 3. A credit check won’t impact your score

More than a quarter of Americans (28%) don’t realize that a lender running a credit check can make their credit score go down, according to the survey. There are two types of credit checks, a hard inquiry and a soft inquiry. When you check your credit, it’s a soft inquiry and doesn’t affect your score. But when a lender checks your score to determine creditworthiness for a financial product, it’s a hard inquiry, and your score can go down.

There are some exceptions. For example, for certain financial products, such as a mortgage or auto loan, several inquiries made in a short period count as a single hard inquiry. The amount of time varies by credit scoring model, but it’s safest to submit all applications within a two-week period. This is known as “rate shopping” and allows you to shop around for the most favorable loan terms.

However, applying for multiple credit cards in a short period doesn’t fall under rate shopping and will result in a hard inquiry for each application. For this reason, limiting the number of card applications you submit is a good idea. Hard inquiries can stay on your credit report for two years, so before applying for a new credit card, make sure it’s available to consumers in your credit score range.

Erin El Issa writes for NerdWallet.

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4 Items for Your Midyear Money Checklist

Posted on by Lauren Schwahn

A lot can happen in six months. That’s why, as we close out the first half of the year, it makes sense to check in on your financial life.

“With inflation, I think people this year are more heavily impacted than they probably have been in many years leading up to this point,” says Jason Dall’Acqua, a certified financial planner and founder of Crest Wealth Advisors in Annapolis, Maryland. “So it’s a good time to see how things have been going … as well as plan for what lies ahead in the remainder of the year.”

So where should you start? Add these four items to your midyear money checklist.

1. Review your income, expenses and goals

You don’t have to tally up every penny you’ve made and spent over the last six months. But taking a few minutes to check a bank or budget app can help you better understand your finances and course-correct if necessary.

“Right now with inflation, even if you had a budget back in January, it probably is not the same as it is today. There are some things that are going to need to be changed. So it’s just really resetting and figuring out where you stand today versus where you thought you were going to stand today,” says Kayla Welte, a CFP with District Capital Management who lives in Denver.

Look for opportunities to scale back if you’ve spent more than anticipated. For example, you can dine out less or cancel subscription services you rarely use. “Any excess spending that you’ve been doing, you may have to cut down to account for this higher cost of things that you absolutely have to buy,” Welte says.

If you set money resolutions or other financial goals earlier this year, check on those too. Have you saved as much toward retirement or an emergency fund as you planned? Are you on track to pay off debt?

2. Deal with debt

Debt is becoming more expensive to carry due to rising interest rates. Pay down debts sooner, particularly those with variable interest rates, to save money. These debts might include credit cards, personal loans or adjustable-rate mortgages.

Concentrate on reducing your highest-rate debt first, then move on to the next highest. Dall’Acqua also suggests switching from variable-rate to fixed-rate options by refinancing, if possible. “If you can lock in the fixed rate now, you’re likely to be saving yourself significantly in interest costs over time,” he says.

Be aware of end dates for loans in forbearance. For instance, federal student loan payments will resume on Sept. 1, barring another extension.

“At this point they have been on pause for nearly two years,” Dall’Acqua says. “So if that money has gotten lost within [people’s] overall spending, it’s going to be a big shock when they then have to resume paying.”

Setting aside money now in a separate savings fund can help soften the blow.

3. Plan holiday shopping

Inflation could make holiday gifts a little pricier this year. Create a shopping list and think about how much you can afford to spend. “Figure out what that would require for you to start saving on a weekly or monthly basis and start putting that money aside right now,” Dall’Acqua says.

Starting on shopping early can also help you manage the cost without accruing debt. Many retailers host major sale events in the summer, so you’ll find discounts well before Black Friday. Amazon’s Prime Day is coming in July. So is the Nordstrom Anniversary Sale.

4. Examine your taxes and benefits

Welte recommends using an online tax calculator to check whether you’re withholding too much or too little. This can help you avoid getting hit with a big tax bill unexpectedly or missing out on extra cash you may need now.

“If you do the math and you’re going to get a $6,000 tax refund, it would be a great time to change your W-4s, get more money in your pocket now to pay for these excess costs that are coming up with inflation rather than waiting until next April to get that refund,” Welte says.

If you need to make adjustments, fill out a new Form W-4 (you can find this on the IRS website) and submit it to your employer.

While you’re at it, evaluate your employee benefit selections. These benefits can include health insurance, life insurance, health savings accounts and flexible spending accounts, plus perks like gym memberships.

Reviewing your choices in the summer can prevent you from becoming overwhelmed in October and November, when open enrollment begins for most companies, says Joe Bautista, a CFP in Lake Oswego, Oregon.

The goal is to ensure you’re choosing the most cost-effective options that suit your needs. For example, “a PPO has higher premiums but a lower cost if you tend to use health care, lower deductibles and copays typically. But if someone doesn’t use that health care, then they can be overspending,” Bautista says.

Don’t worry about getting everything perfect right now. As Bautista says, “financial planning is dynamic, it’s not static.” Check in on your money plans periodically and update as needed.

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Pass This Credit Card Quiz and Cut Your Costs

Posted on by Melissa Lambarena

One look at a typical cardholder agreement makes clear that credit cards come with plenty of fine print. Even so, a lot of information isn’t readily available to cardholders, especially regarding what they can ask for from their card issuers and how they can manage their accounts more cost-effectively.

A recent NerdWallet survey found significant gaps in consumer understanding of credit cards — gaps that can be costly.

“The act of using a credit card is so simple, but they can be complicated products,” says Sara Rathner, a NerdWallet credit cards expert. “Knowing what your card offers, and what you can ask for, can make it significantly more valuable for you.”

Test your knowledge by taking the same quiz given to survey respondents.

1. True or false:

Moving credit card debt to a card with a lower interest rate or a 0% rate will always save you money in the long run.

A balance transfer can help you pay off debt more quickly, but it isn’t always the best option. Moving debt from one card to another usually incurs a fee of 3% to 5% of the amount transferred. That fee could be more than you’d have paid in interest if you’d left the balance where it was and paid it off. So you have to compare costs. A balance transfer is effective only if it saves you money overall — and you use the money you save to pay down your debt even faster.

Answer: False.
Survey respondents who answered correctly: 22%.

2. True or false:

Credit card issuers allow you to ask for an increase in your credit limit.

You can always ask your card issuer for a higher limit, although there’s no guarantee you’ll get it. The issuer will consider various factors beyond your account record, including your income, debts and credit history.

Answer: True.
Survey respondents who answered correctly: 76%.

3. True or false:

Credit card issuers allow you to ask for a lower interest rate.

Similar to seeking a higher limit, you can certainly ask your card issuer if you qualify for a lower rate. You might not get it, but it’s worth picking up the phone to ask, especially with an account in good standing. A lower interest rate means immediate savings if you typically carry a monthly balance.

“If your current card isn’t working for you, it could be worth calling and asking for the change you want,” Rathner says. “If you’re a longtime customer in good standing, the answer might be yes. But if it’s a no, then you can vote with your wallet and shop around for a card that’s a better fit for your needs right now.”

Answer: True.
Survey respondents who answered correctly: 50%.

4. True or false:

Credit card issuers make financial hardship plans available to anyone struggling to make payments.

Some credit card issuers will temporarily lower interest charges or waive fees through a financial hardship plan for cardholders who can’t make payments due to circumstances beyond their control. For instance, you might be eligible if you’ve lost your job or had a family emergency.

But while some issuers offer hardship plans, they don’t make them available to everyone who asks. You’ll have to qualify based on your circumstances. No one is guaranteed to be accepted.

Answer: False.
Survey respondents who answered correctly: 18%.

5. True or false:

If you want to switch to a different card from the same company — for example, to get a lower annual fee or better rewards — you must ask the company to close your original account and open a new one.

Switching cards from the same issuer is called a product change. Since issuers don’t widely advertise product changes, it’s not surprising that many people don’t understand how they work.

If you’re unhappy with your current credit card because of its fees, rewards or other features, you can ask the issuer to switch the account to a different card that’s better suited to your needs. You keep the same account; it just has a new credit card attached to it. Keeping the account open can benefit your credit since scoring models consider the length of your credit history, including the age of your accounts.

Answer: False.
Survey respondents who answered correctly: 23%.

6. True or false:

Credit card issuers waive late fees.

Issuers don’t broadcast that they’ll consider waiving late fees, so it’s not surprising that many people don’t know it’s an option. Not all issuers will waive fees. Those that waive them will do so at their discretion, and they’ll consider it only if you ask. It’s not unusual for an issuer to waive the first late fee for an account in good standing. If granted, that’s a potential savings of up to $30.

Answer: True.
Survey respondents who answered correctly: 37%.

7. True or false:

You can use a credit card without ever having to pay interest.

You won’t be charged interest on purchases if you pay your credit card on time and in full monthly. If you carry a balance from one month to the next, on the other hand, you’ll incur finance charges unless you have a promotional 0% annual percentage rate period in effect.

Putting purchases on your card and paying the bill in full each month avoids interest while still reaping the benefits of a credit card, such as fraud protection, rewards and others.

Answer: True.
Survey respondents who answered correctly: 54%.

8. True or false:

Making the minimum payment every month on a credit card allows you to pay down debt quickly.

Paying only the minimum on a credit card every month can take years to get out of debt. The minimum is usually enough to cover the interest accrued over the past month, plus only a small fraction of the actual debt. Look at your credit card statement to see how long it would take at that rate. You’ll see a table that shows how long it would take to pay off the balance if you made only the minimum payment.

Answer: False.
Survey respondents who answered correctly: 64%.

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The article Pass This Credit Card Quiz and Cut Your Costs originally appeared on NerdWallet.

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The 15/3 Credit Card Hack Is Nonsense — Here’s What to Do Instead

Posted on by Gregory Karp

Sometimes a grain of truth about a financial topic can morph into something that’s just plain misleading. One example is the 15/3 credit card payment trick — or hack — that you might have seen touted on the internet and social media as a secret tactic for improving bad or mediocre credit.

The 15/3 hack claims you can dramatically help your credit score by making half your credit card payment 15 days before your account statement due date and the other half-payment three days before.

Problem is, it doesn’t work.

“Every few years some nonsense like this gains some momentum, but there’s no truth to it,” John Ulzheimer, an Atlanta-based credit expert, said in an email. Ulzheimer has worked for FICO and credit bureau Equifax.

The number of payments you make in a credit card billing cycle — a month — does not help your number of on-time payments, a factor in widely used credit-scoring models. You’ll get credit for just one on-time payment during that month. And there’s nothing magical about 15 days and three days before your due date. In fact, it’s too late by then. At 15 days before your due date, your statement is already closed and your credit card company has likely already reported your information to the credit bureaus.

What is true about credit card payments and what can help? Making multiple payments in a month could help your credit scores temporarily by making it look like you’re using less credit, but not in the way the 15/3 hack describes.

What the 15/3 credit hack claims

Many YouTubers, blog posts and short videos on TikTok claim 15/3 is a secret sure-fire method for elevating credit scores.

We weren’t able to identify the originator of the 15/3 credit card payment method, but this is generally how it is retold in those spaces. Your credit scores will supposedly grow significantly if you:

  • Make half a payment 15 days before your credit card due date. If your payment is due on the 15th of the month, pay it on the 1st.
  • Pay the second half three days before the due date.

Some versions of the 15/3 rule swap in statement closing date for payment due date. The statement closing date comes about three weeks before the payment due date. Targeting the closing date could mean making three payments.

  • Make a payment 15 days before the statement closing date. (Not necessarily half because you don’t yet know what half is. You’re still using the card during the billing cycle.)
  • Make a payment three days before the statement closing date.
  • Pay off whatever is left after the statement closing date but before the due date so you don’t pay late fees or interest. This amount would be whatever you charged during the final three days of the billing cycle.

Why the 15/3 credit hack is wrong

The main problems with the 15/3 hack:

  • Wrong date peg. Typically, on or near your statement closing date — not the payment due date — your credit card company reports to the credit bureau or bureaus with such information as your balance and credit limit. It does this only once a month. Your due date comes about three weeks after that. So targeting the due date makes no sense. Making a payment 15 days and three days before the credit card due date, as the 15/3 hack suggests, is too late to influence credit reporting for that billing cycle.
  • Multi-payment myth. You don’t get extra credit, so to speak, for making two payments instead of one, or making a payment early. Your creditor only reports to the bureaus once a month.
  • 15/3 is random. If you use the 15/3 definition pegging payments to your closing date, that can help, for reasons we’ll discuss below. But 15 and 3 are irrelevant. You might as well make a single payment prior to the closing date. The creditor is just reporting what your balance is at the end of the billing cycle.

“There’s no relevance to when you make the payment or payments prior to the statement closing date,” Ulzheimer said. “You can make a payment every single day if you like. Fifteen and three days doesn’t do anything different than paying it off one or two days before the statement closing date.”

What’s the truth?

The grain of truth in the 15/3 hack is that credit utilization matters to credit scores.

Credit utilization is simply how much credit you’re using vs. how much credit you have. Scoring models award you a higher score if you have lots of available credit, but use very little of it.

Your credit score is a snapshot in time reflecting your creditworthiness. Purposefully lowering your utilization on a certain date is like applying lipstick before the photo is taken.

But your effort to pretty-up your utilization only lasts one month — until the next month when your creditors report your balances and limits again and you have a new utilization ratio. So unless you were going to apply for a loan or otherwise needed to show a handsome credit score on a specific date, your effort was wasted.

It’s like you put on a fine suit but sat home alone. Nobody saw it, or cared.

Credit utilization ratio details

For a single credit card, the relevant dollar figures are your last-reported balance compared with your last-reported credit limit. If you’re using $1,000 of a $2,000 credit limit on the card, you have a 50% credit utilization, which is considered somewhat high.

Generally, credit scores react best to utilization below 30%, and below 10% is ideal. With our example of a $2,000 credit limit, that means keeping your balance under $600 or $200, respectively. Of course, that’s not possible for everybody, especially not for those with relatively low credit limits. A $500 credit limit can get used up fast in a month.

Credit utilization accounts for nearly one-third of your credit score — 30% in the popular FICO score model. So lowering your utilization can, indeed, polish your scores. But with credit cards, your utilization bounces up and down during the month as you make charges and pay them off.

Overall, the 15/3 hack attempts to make your utilization look better, which is a fine goal and standard advice. It just misses the mark by offering the wrong time peg and irrelevant numbers of days before that time peg.

“This is neither novel nor some sort of a secret hack to the scoring system,” Ulzheimer said.

What really helps your credit score

Your credit score is affected by these factors, and generally in this order of importance, according to FICO:

  • Payment history.
  • Credit utilization.
  • Length of credit history.
  • Mix of credit types.
  • Recent applications for credit.

While the 15/3 hack won’t help your credit directly, it could indirectly if it keeps you disciplined to pay your credit card bill on time. Or, for example, maybe it helps you time your payments to coincide better with your paychecks.

But paying early according to the 15/3 rule generally has no merit.

“The truth is paying your bill before the due date will never, ever increase your scores by some drastic amount,” Ulzheimer said.

—

The article The 15/3 Credit Card Hack Is Nonsense — Here’s What to Do Instead originally appeared on NerdWallet.

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The 15/3 Credit Card Hack Is Nonsense — Here’s What to Do Instead

Posted on by Gregory Karp

The 15/3 Credit Card Hack Is Nonsense — Here’s What to Do Instead

Sometimes a grain of truth about a financial topic can morph into something that’s just plain misleading. One example is the 15/3 credit card payment trick — or hack — that you might have seen touted on the internet and social media as a secret tactic for improving bad or mediocre credit.

The 15/3 hack claims you can dramatically help your credit score by making half your credit card payment 15 days before your account statement due date and the other half-payment three days before.

Problem is, it doesn’t work.

“Every few years some nonsense like this gains some momentum, but there’s no truth to it,” John Ulzheimer, an Atlanta-based credit expert, said in an email. Ulzheimer has worked for FICO and credit bureau Equifax.

The number of payments you make in a credit card billing cycle — a month — does not help your number of on-time payments, a factor in widely used credit-scoring models. You’ll get credit for just one on-time payment during that month. And there’s nothing magical about 15 days and three days before your due date. In fact, it’s too late by then. At 15 days before your due date, your statement is already closed and your credit card company has likely already reported your information to the credit bureaus.

What is true about credit card payments and what can help? Making multiple payments in a month could help your credit scores temporarily by making it look like you’re using less credit, but not in the way the 15/3 hack describes.

What the 15/3 credit hack claims

Many YouTubers, blog posts and short videos on TikTok claim 15/3 is a secret sure-fire method for elevating credit scores.

We weren’t able to identify the originator of the 15/3 credit card payment method, but this is generally how it is retold in those spaces. Your credit scores will supposedly grow significantly if you:

  • Make half a payment 15 days before your credit card due date. If your payment is due on the 15th of the month, pay it on the 1st.
  • Pay the second half three days before the due date.

Some versions of the 15/3 rule swap in statement closing date for payment due date. The statement closing date comes about three weeks before the payment due date. Targeting the closing date could mean making three payments.

  • Make a payment 15 days before the statement closing date. (Not necessarily half because you don’t yet know what half is. You’re still using the card during the billing cycle.)
  • Make a payment three days before the statement closing date.
  • Pay off whatever is left after the statement closing date but before the due date so you don’t pay late fees or interest. This amount would be whatever you charged during the final three days of the billing cycle.

Why the 15/3 credit hack is wrong

The main problems with the 15/3 hack:

  • Wrong date peg. Typically, on or near your statement closing date — not the payment due date — your credit card company reports to the credit bureau or bureaus with such information as your balance and credit limit. It does this only once a month. Your due date comes about three weeks after that. So targeting the due date makes no sense. Making a payment 15 days and three days before the credit card due date, as the 15/3 hack suggests, is too late to influence credit reporting for that billing cycle.
  • Multi-payment myth. You don’t get extra credit, so to speak, for making two payments instead of one, or making a payment early. Your creditor only reports to the bureaus once a month.
  • 15/3 is random. If you use the 15/3 definition pegging payments to your closing date, that can help, for reasons we’ll discuss below. But 15 and 3 are irrelevant. You might as well make a single payment prior to the closing date. The creditor is just reporting what your balance is at the end of the billing cycle.

“There’s no relevance to when you make the payment or payments prior to the statement closing date,” Ulzheimer said. “You can make a payment every single day if you like. Fifteen and three days doesn’t do anything different than paying it off one or two days before the statement closing date.”

What’s the truth?

The grain of truth in the 15/3 hack is that credit utilization matters to credit scores.

Credit utilization is simply how much credit you’re using vs. how much credit you have. Scoring models award you a higher score if you have lots of available credit, but use very little of it.

Your credit score is a snapshot in time reflecting your creditworthiness. Purposefully lowering your utilization on a certain date is like applying lipstick before the photo is taken.

But your effort to pretty-up your utilization only lasts one month — until the next month when your creditors report your balances and limits again and you have a new utilization ratio. So unless you were going to apply for a loan or otherwise needed to show a handsome credit score on a specific date, your effort was wasted.

It’s like you put on a fine suit but sat home alone. Nobody saw it, or cared.

Credit utilization ratio details

For a single credit card, the relevant dollar figures are your last-reported balance compared with your last-reported credit limit. If you’re using $1,000 of a $2,000 credit limit on the card, you have a 50% credit utilization, which is considered somewhat high.

Generally, credit scores react best to utilization below 30%, and below 10% is ideal. With our example of a $2,000 credit limit, that means keeping your balance under $600 or $200, respectively. Of course, that’s not possible for everybody, especially not for those with relatively low credit limits. A $500 credit limit can get used up fast in a month.

Credit utilization accounts for nearly one-third of your credit score — 30% in the popular FICO score model. So lowering your utilization can, indeed, polish your scores. But with credit cards, your utilization bounces up and down during the month as you make charges and pay them off.

Overall, the 15/3 hack attempts to make your utilization look better, which is a fine goal and standard advice. It just misses the mark by offering the wrong time peg and irrelevant numbers of days before that time peg.

“This is neither novel nor some sort of a secret hack to the scoring system,” Ulzheimer said.

What really helps your credit score

Your credit score is affected by these factors, and generally in this order of importance, according to FICO:

  • Payment history.
  • Credit utilization.
  • Length of credit history.
  • Mix of credit types.
  • Recent applications for credit.

While the 15/3 hack won’t help your credit directly, it could indirectly if it keeps you disciplined to pay your credit card bill on time. Or, for example, maybe it helps you time your payments to coincide better with your paychecks.

But paying early according to the 15/3 rule generally has no merit.

“The truth is paying your bill before the due date will never, ever increase your scores by some drastic amount,” Ulzheimer said.

Gregory Karp writes for NerdWallet. Email: gkarp@nerdwallet.com. Twitter: @spendingsmart.

The article The 15/3 Credit Card Hack Is Nonsense — Here’s What to Do Instead originally appeared on NerdWallet.

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Is Buy Now, Pay Later Really Better for Me Than a Credit Card?

Posted on by Funto Omojola

For many consumers, the ease and flexibility of spreading payments over a longer period of time makes “buy now, pay later,” or BNPL, plans appealing.

Add in the possibility for lower interest rates, and BNPL is becoming an increasingly popular alternative to using a credit card. According to a 2021 study by C+R Research, 56% of BNPL users surveyed said they prefer using BNPL over credit cards for these and other reasons.

BNPL definitely has advantages over credit cards for some consumers in some situations. But credit cards have advantages in others. Which option makes the most sense for you depends on several factors, including how much you’re spending, how much it will cost to carry the debt and how quickly you can pay it down.

Ask yourself these questions to determine which option, if either, is right for you.

How much can I afford to pay upfront?

Most buy now, pay later options require you to pay a portion of the total purchase upfront, while the rest is broken up into equal installments that are due over a set period of time — usually six weeks. This popular “Pay in 4” model is offered by most of the largest BNPL services, like Afterpay and Klarna.

Having to pay upfront for smaller purchases might not affect your immediate cash flow, but for larger purchases, it can be difficult to manage. For example, if you make a $2,000 purchase with a buy now, pay later loan, you’ll have to pay $500 immediately upfront. And the higher the total amount of your purchase, the steeper the required amount due at checkout will be.

Plus, if you take out multiple such loans at once, you might end up shelling out more cash than you can afford. (Four $1,000 loans around the same time requires $1,000 upfront in total, for instance.) According to a Barclays UK 2021 study, 36% of BNPL users surveyed admitted to using the loans to spend more than they can afford, and an equal number of users said they did not fully understand the ramifications of missing repayments.

Like BNPL loans, credit cards can also help consumers make purchases they don’t have the immediate cash for. But one main differentiator is that when you make a purchase with a credit card, you won’t be required to pay anything upfront. So if you charge a $2,000 purchase on a credit card, that amount will be added to your card balance — a portion of which will be owed at the end of the monthly billing cycle. (More on this below.) Because you don’t have to pay any amount upfront when you make your purchase, paying with a credit card can lessen the initial financial burden of repayment.

How much time do I need to pay off my purchases?

If you make your BNPL payments on time and pay them in full, you won’t incur any interest or late fees. But if you miss your payments, there can be late fees charged and your debt could be sent to collections.

Similar penalties apply for missed credit card payments: Late payments can incur interest and late fees, and can negatively impact your credit score. However, an important distinction between the two financing options is that while you’ll only have a set period of time to pay off a BNPL loan, you can roll debt over on a credit card from month to month.

Credit card considerations

While it’s advisable to pay your balance in full every month to avoid incurring interest, larger purchases on credit cards might necessitate carrying a balance and paying it down monthly. But unlike most buy now, pay later loans, there’s no set time frame within which you’re required to pay off your total purchase. Rather, at the end of each monthly billing cycle, you’ll have a balance, of which you’ll be required to pay a monthly minimum, plus interest. This minimum will vary based on how much you owe and on your interest rate — typically 2% to 4% of your total balance, or a fixed amount anywhere between $25 to $35 if your balance is low.

Remember, however, that when you roll over your credit card balance and don’t pay in full, you’ll be charged interest — which can be high depending on your creditworthiness and how much debt you’re carrying. Plus, failing to pay the minimum monthly payment due can lead to a penalty APR, which is a hiked interest rate, and can also negatively impact your credit.

Note: If your purchase is particularly large and will take some time to pay down, consider a 0% APR credit card. Such options come with promotional periods, typically ranging from 12 to 18 months, during which you won’t be charged any interest. This can potentially be a better option than taking on debt from a buy now, pay later loan. Note, though, that 0% APR cards typically require good to excellent credit scores to apply. And once the interest-free period ends, you’ll be responsible for paying the card’s ongoing interest rate on new purchases, as well as any remaining balance left from the promotional period.

BNPL considerations

With a typical “Pay in 4” buy now, pay later model, borrowers have to pay 25% of the purchase upfront, and then the remaining 75% in three payments over the course of six weeks. Such short repayment periods can not only make it easier to default on the loan, but it also means you’ll have to pay larger sums. A minimum monthly payment on a credit card could make more sense if you can’t afford to shell out a large amount of money at once. For example, a $1,000 purchase on a credit card that you don’t pay in full right away, or roll over, might mean that you’ll pay at least $20 each month, not including your interest rate and assuming it’s the only purchase on your credit card. But a $1,000 purchase with a buy now, pay later loan will cost you $250 per installment. And if you miss one of those required payments, you’ll be penalized.

While some of the most popular “Pay in 4” BNPL services don’t charge interest, there are still varying fees associated with delinquency. Zip (formerly Quadpay) users, for example, are charged a late fee of $5, $7 or $10, depending on which state they live in. And in addition to being temporarily prohibited from using the service, if you miss an Afterpay payment, you’ll be charged a capped late fee starting at $10 and no more than 25% of the initial purchase price.

Additionally, there are longer-term buy now, pay later services that do charge interest, and these rates are often high. For example, Affirm can charge up to 30% APR depending on the store you’re making a purchase from and on your credit score. This is significantly higher than the average APR charged for cards that incur interest.

If you pay your loan off in the allotted six weeks, you’re off the hook and you won’t be charged any interest or fees. But because such short repayment periods can make it easier to default, consider whether you can afford to pay off your purchase within the fixed repayment time before opting for a buy now, pay later option. If you think you’ll need more time, you’re better off making your purchase with a credit card instead.

Note: In February, one of the three major credit bureaus, Equifax, announced that it would be the first to include buy now, pay later repayments on its credit reports. According to Equifax research, inclusion of on-time BNPL payments could increase credit scores. But late payments, on the other hand, could have a negative effect.

Which option am I eligible for?

When you apply for a credit card, the issuer performs a hard pull: It takes a survey of your credit history and scores, which indicates how risky of a borrower you are. When you apply for a BNPL loan, however, there isn’t a hard credit check performed to determine your eligibility to get one, and your score isn’t affected. This makes it easier for those with no credit or poor credit to be approved for a loan.

To this end, if you are unable to qualify for a credit card due to a poor credit score and you have to make a necessary purchase but can’t afford to pay for it in full upfront, BNPL can offer access to flexibility that a credit card might not. But in such cases, it’s important to look for a servicer that charges no interest, like Afterpay and Klarna, and to make a plan for repayment.

Note that because BNPL servicers are not performing hard pulls, it means that applicants are not screened based on their ability to carry or repay a new loan. So even if you are juggling multiple BNPL loans, you’ll usually still have access to opening additional loans. That makes it easier for users to take on more than they can handle and can lead to a cycle of debt.

It’s important to survey your finances before opting for a loan. And if you’re already carrying multiple loans, avoid taking on more debt by applying for a new BNPL plan.

Funto Omojola writes for NerdWallet. Email: fomojola@nerdwallet.com.

The article Is Buy Now, Pay Later Really Better for Me Than a Credit Card? originally appeared on NerdWallet.

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8 Tactics to Break the Credit Card Debt Cycle

Posted on by Melissa Lambarena

Upon paying off between $12,000 and $15,000 in credit card debt in 2019, Yamiesha Bell, a special education teacher in New York, didn’t break up with her credit cards.

With goals to buy a car and a house, Bell hoped to preserve her credit history by keeping her cards open and active.

“I needed to sustain my credit in order to get the interest rates I wanted in the future,” she says.

While credit cards aren’t ideal for everyone, they can aid your credit journey if used responsibly. When reconciling with credit cards, you need a personalized stay-out-of-debt plan. Here are a few strategies to consider.

1. Reflect on spending habits

Maybe you ditched debt, but history can repeat if you don’t unpack the motivations that contributed to it. A get-out-of-debt plan that works in the short term may not be sustainable over the long term if it doesn’t align with your priorities, according to Julia Kramer, a financial behavior and leadership consultant at Signature Financial Planning in Pennsylvania.

Kramer suggests tracking transactions dating back a week or more. Add a plus sign next to those purchases you’re willing to repeat and a minus sign next to those you’re not. For obligatory purchases like gas and groceries, add an equal sign.

Note the date, the item purchased, the amount and the need the purchase met. Those frequent lattes or meals out with friends may be more about the personal connection experienced, or something else, as opposed to the gratification provided by the item, according to Kramer.

This information is key to identifying areas in your budget that are negotiable. For example, you may be more willing to choose budget-friendly food in order to keep a facial that meets an internal need for self-care and connection, Kramer says.

If your spending strays upon experiencing feelings like anxiousness or boredom, make a plan for those occasions. It might mean budgeting extra money or employing tricks like using a credit card lock feature to prevent spending.

2. Use cash for certain categories

If you want to reel in spending on categories like dining out or entertainment, for example, set aside physical cash to stay within budget. Money in hand can lead to more mindful spending, according to Kramer.

3. Track spending

Create a tracking system that works for you. Setting up spending alerts on a credit card account can notify you if purchases exceed a certain amount. Tracking spending with a spreadsheet, bullet journal or budgeting app, for instance, can also help with mental accounting.

“I would not open up credit cards if you do not have a system in place where you track spending every month,” Kramer says. “It has to be something that appeals to you that you know you’re going to do.”

For Bell, a cash envelope tracking system helps her manage spending in different categories, including her credit card bill payment.

“When you look in a cash envelope and you see you only have $50, it’s very clear that once that money runs out there’s nothing else I can do,” she says.

4. Use credit cards for planning purchases only

Ease your way back into credit cards with small planned purchases, like a subscription service payment.

After paying off debt, Bell only uses credit cards for in-budget purchases, and she pays them off in full each month to avoid interest charges. Initially, she left her credit card at home to avoid relying on it.

5. Have an emergency fund to fall back on

An emergency fund of even $500 for a car or home repair may keep debt off of your credit cards. Start small and aim, eventually, to cast a wider safety net over time — ideally, three to six months of living expenses stowed in a high-yield savings account.

If you previously got used to budgeting a certain amount each month to pay creditors, keep that momentum going, but direct funds toward savings instead.

6. Don’t store credit card info on websites or apps

Convenient payment options can sometimes lead to mindless spending. By entering payment information into forms for every online purchase, you’ll have more time to think through a purchase.

7. Get an accountability partner

A nonjudgmental partner or trusted loved one can offer input on a purchase or a stay-out-of-debt plan. An accountability partner can be a sounding board that lets you listen out loud to your own justifications for financial decisions.

8. Update your strategy

As motivations and priorities change, your stay-out-of-debt plan should follow. Continue revisiting credit card statements to identify the needs that are being met by purchases and which are most important.

If in this process you continue having frequent run-ins with debt, consider closing credit card accounts even if it can negatively impact credit scores.

“A big thing about this is knowing yourself and knowing what your challenge areas are and finding ways that work around them,” Bell says. “Five years from now it might look different, but for right now that’s what works.”

This article was written by NerdWallet and was originally published by The Associated Press.

Melissa Lambarena writes for NerdWallet. Email: mlambarena@nerdwallet.com. Twitter: @LissaLambarena.

The article 8 Tactics to Break the Credit Card Debt Cycle originally appeared on NerdWallet.

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