If you use it responsibly, a credit card can be one of your most empowering assets. That being said, people can and do make some financial mistakes from time to time. However, there are a number of mistakes that can set you on a path of financial ruin, for lack of any better way to put it. Rather than shy away from the dark side of plastic, get educated so you can stay on top with our list of the ten worst credit card mistakes to avoid.
- Making a Late Payment
- Maxing Out Your Credit Card
- Making Only the Minimum Payments
- Applying for Too Many Credit Cards
- Choosing the Wrong Type of Credit Card
1. Making a Late Payment
Missing or making a late payment is one of the worst credit card mistakes you can make because it is one of the main factors that will negatively affect your credit. Your credit card issuer will report all of your payment activity to the credit bureaus. In other words, late payments will appear on your credit report and potentially lower your credit score.
Plus, if you miss payments, your account could be put into default, or you'll be subject to late fees or a higher penalty interest rate.
2. Maxing Out Your Credit Card
Your credit score is also calculated using your credit utilization ratio — the percentage of your balance compared to your overall credit limit. Ideally, you want to keep this around 30% because the higher it is, the more lenders will believe you're a risky borrower. Maxing out your credit card will make it seem like you can't handle your finances.
3. Making Only the Minimum Payments
Even if you're making on-time payments, paying the bare minimum means you'll be paying the maximum amount of interest over a number of years. Since credit cards tend to have rates in the double digits, that's a lot you'll be paying. Consider paying more — as much as your budget will allow — or even the entire statement balance each month so that you're paying as little interest as possible. If you pay off the balance more frequently — after every major purchase clears or on a weekly basis — you'll stay ahead of your monthly bill completely.
4. Applying for Too Many Credit Cards
While it might seem fun to "collect the whole set," submitting too many credit card applications at one time may raise a red flag to lenders. Why would you need so many? Is it because of a financial issue? Plus, each application means you'll be subject to a hard inquiry, which could lower your credit score temporarily.
If you want multiple credit cards, make sure you're being strategic about it. Space out your applications 90 days to six months apart and only apply to ones you really want.
5. Choosing the Wrong Type of Credit Card
There are so many credit cards out there and each one helps you achieve different financial goals. For instance, there are cards for college students, cards to help you build credit, and cards that earn rewards for travel. Choosing the wrong card could mean your application will be denied, or you could potentially have an annual fee for a card that doesn't meet your needs.
Before applying for a new card, make a list of your goals for that card. Maybe you want to apply for a credit card offered by the local home improvement store now that you own a home. Or maybe your significant other lives on the opposite coast now, so you're interested in cards with travel rewards. Having a specific goal for each credit card also helps you limit extra spending. Once you know what you want, do some research to find the right card for you.
6. Ignoring Your Credit Card Transactions
Checking your credit card statements and transactions can serve a few purposes. One, you can see if you're on budget for the month. Second, it'll help you spot any fraudulent charges. Credit card issuers will allow you to report fraudulent transactions and any errors you see on your credit card statement, so make sure you're proactive about doing so.
7. Canceling Your Credit Card
It might seem like a good idea to cancel a credit card that you don't use but doing so could increase your credit utilization. That's because canceling the credit card will lower your overall credit limit. If you're canceling your oldest credit card, it could also negatively impact your credit history since lenders also look at the length of your credit accounts.
8. Not Reading the Fine Print
Understanding credit card terms like your APR (annual percentage rate), introductory rates, and balance transfer fees is important so you know what to expect beyond the card's main selling points (the features that credit card issuers want you to see first). Don't assume you'll never need to transfer your balance or take out a cash advance. Instead, make sure you know when your 0% introductory rate will expire and that you're comfortable with what fees are involved in secondary features from the get-go.
9. Taking Out Cash Advances
Speaking of cash advances, they're fine in a pinch. However, using this as a regular source of cash will end up costing you big time. Not only will you pay a fee, you'll also be charged interest right away. Instead, use your credit card for purchases where the APR tends to be lower and offers a grace period before you have to start paying interest.
10. Not Comparing Credit Card Offers
Whatever your credit situation, there are usually a few credit card options to choose from. Given that, it's important to shop around and find the best fit. For instance, if you want to take advantage of a 0% introductory offer for purchases, it's a good idea to find one that offers the longest period. Or if you're looking for a card for those with bad credit, you can find one with a low or no annual fee.
Now that you know what not to do with a credit card, you can hopefully avoid the ten mistakes we mentioned above. Being responsible with your credit card usage will ensure your credit score goes up and that you'll be able to manage your finances better.