Here are a few other dangerous things you might be tempted to do with a credit card:
1. Give it to your kid
The inherent danger involved with giving your offspring a credit card is nothing new to parents. But the Credit CARD Act has created some new situations to think about.
The law prohibits card issuers from giving credit cards to anyone under 21 unless that individual has proof of enough income to pay off debt. As a result, some parents are co-signing on cards for their under-21 kids or adding their kids as authorized users on their own credit cards.
A young person with Mom’s or Dad’s GE Money credit card can be dangerous unless you have a plan. Make it clear that your kid needs your permission to make a purchase with the card. Stress that the card is an alternative to carrying cash — not a way to get something that there isn’t money to pay for.
Make sure you monitor credit card purchases, just in case that plan isn’t being followed.
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 and 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 lets you set a limit on your card. When a cardholder reaches the limit, the card is rejected. But the best step is to monitor your credit card statements and know what your balances are.
3. Use it on a website that’s not encrypted
You 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 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 damage your credit scores. Scores are partly tied to credit-utilization ratios — card balances compared with available credit. Max out your cards, and your utilization ratio goes up. This scenario usually results in credit scores 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 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 the 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 to 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 strong magnet or by scoring the strip with scissors. Then shred the card or cut it into pieces. If this is a bad “breakup” with your issuer, you might even find the process a little cathartic.