When you think about the words "danger" and "credit card," the first thing to pop into your head is probably debt. The over-your-head kind of debt that can happen when you're not paying attention to how much you're spending. But staying out of debt is only one danger to avoid when it comes to your credit card.
Here are a few other dangerous things you might be tempted to do with your credit card:
#1: Give it to your teenager
The inherent danger involved with giving your teen a credit card is nothing new to parents. But the Credit CARD Act has created some new situations to think about. The Act prohibits card issuers from giving credit cards to anyone under the age of twenty-one unless that individual has proof of income substantial enough to pay off debt. Some parents are co-signing on cards for their teens or adding their teen as an authorized user on one of their own credit cards.
A teen with Mom's or Dad's credit card can be a dangerous thing unless you approach it with a plan. Make it clear that your teen needs your permission to make a purchase with the card. If your teen is expected to pay the bill, stress that the card is an alternative to carrying cash, and not a way to get something you don't have the money to pay for. Oh, and monitor credit card purchases (just in case they don't follow your plan).
#2: Give it to an employee or contractor
One of the most famous examples of this situation involves Kim Kardashian. She was hired as a "consultant" for R&B singer Brandy Norwood. Kardashian claimed that Norwood's mom gave her a credit card to make purchases. Kardashian allegedly went on a shopping spree with her client's credit card. The damage? $120,635.82.
If you run a business and you need to give a credit card to an employee or contractor, choose a card that allows you to set spending limits. Another option on the horizon is MasterCard's inControl, which is a service that lets you set limits on your card. When the cardholder reaches these limits, the card is rejected. But the best step, for now, is to monitor your credit card statements and know what your balances are. No exceptions!
#3: Use it on a website that's not encrypted
You absolutely must make sure you're on a secure, encrypted website before you key in your credit card number. Secure websites have encryption software designed to prevent identity theft. When you're on a secure website, you'll see a lock icon in your browser's address bar and "https://" in the URL. Note the "s" at the end of "http."
#4: Spend all the way up to your credit card limit
There are a couple of issues here, with piling up debt being the obvious problem. But maxing out your cards also has the potential to negatively impact your credit score. Part of your FICO score calculation is tied to your credit utilization ratio. This refers to the balance on your credit cards compared to the amount of available credit you have left on your cards. Max out your cards, and your utilization ratio goes up. This scenario usually results in your credit score going down.
There are also "intangibles" to think about. If you suddenly use up your credit limit, your card issuer could take this as a signal that you're in financial dire straits. An alarmed issuer might raise your interest rate. (Note that issuers can still raise your interest rate after the first year if they give you 45 days notice.) And what if you suddenly need a new dishwasher? You should, of course, have an emergency fund for such unexpected expenses. But in these uncertain economic times, that's not always possible.
#5: Dispose of it improperly
If you decide you no longer want to keep a particular card, you need to do three things. First, make sure the balance is paid off before you close the account. Second, call customer service and confirm that your balance is zero. If it's zero, go ahead and inform the service rep that you're closing your account. The amount of hoop jumping at this point depends on the card issuer. But stick with it until you're sure you've closed the account. It's also a good idea to send a letter to the issuer stating that you've closed the account and include details from the call.
Third, cut up your card. There's actually a correct way to do this. You need to disable the magnetic strip with a magnet or by scoring the strip with scissors. Then, either shred the card or cut it up into pieces. This CardRatings story on credit card fraud gives you details on how to cut up your card for the trash can. And if this is a "bad breakup" with your issuer, you might even find the process a little cathartic.
About the Author
Beverly Blair Harzog was a spokeswoman and contributing editor for CardRatings.com. She's a former CPA and an award-winning personal finance journalist. She's a former columnist for the Navy Federal Credit Union's magazine, Home Port, and has written about credit issues for CNNMoney.com, FoxBusiness.com, Good Housekeeping, Bankrate.com, Bottom Line Wealth, CreditCards.com, AARP Bulletin Today, and more. Harzog's also the co-author of The Complete Idiot's Guide to Person-to-Person Lending (Alpha Books/Penguin, April 2009). Follow her on Twitter @beverlyharzog