Having credit cards can be a great financial tool. They can help you build your credit, earn rewards for yourself, and provide some breathing room for your budget. However, if you’re not managing the usage of your credit cards correctly, what can happen is the opposite of being helpful.
To help you avoid that, we’re going to look at common habits that people have with credit cards that you should leave behind.
Here are the ten worst credit card mistakes a person can make and what you can do to avoid them.
Ten Worst Credit Card Mistakes
- Not asking for increases of credit limits
- Closing a credit card
- Applying for multiple credit cards at one time
- Overspending by using your credit card
- Picking a credit card that doesn’t suit your lifestyle
- Not understanding the terms of your credit card
- Not keeping a close eye on your transactions
- Keeping high balances
- Only making minimum payments
- Making late payments
Not Asking for Increases of Credit Limits
Having higher credit card limits will lower your credit utilization ratio, especially if your spending stays the same. It’s recommended that you request a credit limit increase on each of your cards once every year. That is unless your credit issuer automatically performs credit limit increases. By doing this, your credit will get regular bumps, and your budget will become more flexible.
Closing a Credit Card
You might feel, after reading this article, that credit cards are too bothersome to keep, or you might’ve already been thinking about getting rid of your credit cards. Before you do anything, you should know that there are many other things that you can do with your unwanted card instead of canceling it that are much better for your credit score.
You shouldn’t close credit cards because doing so shrinks your overall credit limit, thus increasing your credit utilization ratio, which can cause hurt your credit score. Instead, what you can do is ask for a product change from the same card issuer to get something that matches your financial requirements better.
For example, if the credit card’s annual fee doesn’t add value to your credit card, try to get a card with no annual fee.
Applying for Multiple Credit Cards at One Time
Having credit cards can be great for your overall financial well-being and your credit score. But you shouldn’t rush to get all the credit cards that you want at one time. Every credit card application puts a hard inquiry on your credit report, which takes your credit score down a few points. While one hard inquiry won’t have much effect on your credit score, multiple hard inquires will.
Additionally, credit lenders see this behavior as a very red flag because they assume that you’re looking for access to several lines of credit at one time because of financial distress. This is why it’s a great idea to be very strategic when applying for credit cards and make sure there’s space between each application.
Overspending By Using Your Credit Card
We’re not going to tell you how to spend money. You could quite literally spend over $100 at the local bookstore and say that it was an “essential” expense. What we do want to say to you is that you need to treat your cred funds carefully.
It can be extremely easy not to consider how much you’re spending on your credit card, especially since the money doesn’t come from your bank account, and you’re able to repay the money later. So, why shouldn’t you buy all the things you want? Let us tell you that this train of thought is dangerous because it can lead to charge-offs.
Another way that you can overspend on your credit card is by chasing rewards. Rewards should be all about getting something extra while you’re doing your normal shopping. Otherwise, you’re not getting anything.
Think about it in these terms: If you typically spend $1,500 a month using your credit card and it earns a two percent cash-back, you’ll get $30 in rewards. However, if you spend $2,000, you’ll get $40, which is a whole $10 more. But you need to realize that you’re also spending $500 more than you typically do. Do you see what we’re trying to say?
Picking a Credit Card that Doesn’t Suit Your Lifestyle
Not every credit card is the same because they all serve different financial goals. If you’re looking into getting a new credit card, it’s highly recommended that you do some research to find the best credit card option for you.
For example, if you’re brand new to credit, you should look into secured credit cards and student cards. While secured credit cards aren’t very interesting, they have several different options available, and they’re better in the long run. For example, there’s hardly ever a reason to get a secured credit card that will charge you an annual fee.
If you’re looking for a credit card that will give you cash-back, there are cash-back credit cards for all spenders. Same with travel credit cards: some travel cards charge you high annual fees while offering luxurious perks, while others are much more affordable and better for casual travelers.
Understand why you’re getting a credit card and take it seriously. Remember that getting a credit card is a big commitment, so you need to make sure that you’re finding a card that matches your lifestyle.
Not Understanding the Terms of Your Credit Card
Reading the terms of your credit card isn’t fun but getting bombarded with unexpected fees is worse. The terms and conditions of your credit card will provide you with an idea of balance transfer fees, introductory rates, and other charges that you can expect to incur with special circumstances.
For instance, if you’ve opened a credit card with a zero percent interest rate, that doesn’t mean that you won’t ever pay interest on it. The zero percent rate is typically an introductory rate, and it’s highly recommended that you pay off your credit balance in full before that rate expires.
Not Keeping a Close Eye On Your Transactions
Make a habit of checking your credit card transactions and activity regularly. You can do this by going through your billing statement or by visiting your online credit card account. If you find a charge that you haven’t made, that’s one of the first signs of fraudulent activity, which can become rather expensive if you ignore it.
The billing statement can also be a good source of information, especially if there are changes to your credit card – you’ll find them on your billing statement.
Keeping High Balances
It’s a bad idea to have high balances or max out your credit card, and not only because of expensive interest fees.
The credit utilization ratio – which tells you how much of your line of credit you’re using – is an important credit sore calculating factor. If you have a higher than 30 percent ratio, it can have a negative impact on your credit score. Potential credit lenders that check your credit report might also be wary of this financial behavior because they might see it as you not managing your debt responsibly
Only Making Minimum Payments
It should go without saying that you want to make at least the minimum payment on your credit cards to avoid mistake #10. However, by only paying the minimum payment due, you’re also putting yourself in a bad credit situation that will bury you in credit card debt for a while. This is especially true if you have thousands of dollars in debt.
You’ll also be spending a lot of money paying interest unless you have an introductory period interest rate of zero percent.
Making Late Payments
This is by far the worst of the ten worst credit card mistakes a person can make. Late payments can be one of the worst things for your credit because they stay on your credit report for seven years. That’s a very long time to have a credit mistake on your report.
As you have more late payments, and the later those late payments are, the more your credit score will drop. If you wait long enough, your credit card will be charged off, and your account will ultimately be sold to collections.
Avoid this at all costs. If you’re forgetful, you should set up automatic payments or reminders, so you remember to pay your bills on time.
Now that you have a better understanding of the ten worst credit card mistakes a person can make, we hope that you can work hard to avoid making any of the ten worst credit card mistakes. Having insight into the top ten worst credit card mistakes can help you build your credit, not hurt it.