Credit Card Mistakes to Avoid

Given how common credit cards have become and all the enticing offers available from credit card providers, it is important to understand the common credit card pitfalls. Making one of these mistakes could result in a hit to your credit score, being rejected by creditors, higher interest payments, and failing to take advantage of the benefits available from responsibly using your credit card. Credit cards are great tools that offer purchase and fraud protection superior to most other purchase methods.

Carrying a Balance

You can use your credit card for free. Credit cards sometimes have a bad reputation due to the extremely high interest rates, but you can use your credit card for everyday purchases and never pay interest. The key is to avoid carrying a balance over from one month to the next. In other words, pay off your statement balance before the due date. One of the biggest mistakes you can make with a credit card is carrying a balance because this is when credit card interest payments accumulate. Additionally, as soon as you create the habit of carrying a balance between months, it becomes easier to allow that balance to slowly grow.

Making the Minimum Payment

Another credit card trap is paying the minimum balance. This is a creditor’s dream because it means you will be in debt for the longest time possible and pay the most interest possible. When you only pay the minimum balance, the majority of your payment goes towards interest. Minimum balance payments typically only pay 1-2% of the loan balance. As a result, it takes an extremely long time to pay down the balance. The Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (Card Act) requires creditors to indicate how long it will take to pay off a credit card making only the minimum payments. Look at your next credit card statement, and this timeline will be illustrated along with the lifetime interest you will pay. Typically, the interest paid from making only the minimum payments results in your repayment amount doubling; the interest paid is essentially equal to the initial amount borrowed.

Missing a Payment

Numerous factors that impact your credit score, but the one that will produce the greatest harm is missing a payment. On-time payments are the biggest factor influencing your credit. Therefore, one or multiple missed payments will result in a sharp drop in your credit score. Additionally, these late payments will remain on your credit report for 7 years. Consequently, the best step you can take is to set up automatic payments. Using autopay ensures all your payments are made on time and removes the potential for human error (i.e. forgetting).

Applying for Multiple Credit Cards in a Short Period

When you apply for a credit card (or any other type of credit), the creditor runs a hard inquiry. Hard inquiries typically result in a slight drop in your credit score. Numerous credit card applications in a short period will have a cumulative negative impact due to a series of small hits. As a result, you should carefully consider credit card offers before opening a new account. If you want multiple credit cards, space out your applications, rather than applying for them all within the same few months. The general rule of thumb is to wait around six months between applications. A hard inquiry will stay on your credit report for two years, but, over time, the negative impact is lessened. After a year, the inquiry will no longer impact your FICO score. While the credit bureaus also established VantageScore variants of your credit score, the FICO score is the gold standard and will be utilized by most creditors when evaluating your application.

Closing Your Oldest Account

Length of credit history makes up 15% of your FICO credit score calculation. It is based on the average age of your accounts, as well as your oldest account and newest account. As a result, you typically want to maintain the first credit card you opened. Ideally, this card will have no annual fee. If you opened a card with an annual fee, call your credit card provider to see if it is possible to “downgrade” the card to one without an annual fee. Downgrading the card will keep the same credit line open, which will not impact your score; it will appear on your credit report as if nothing changed. Unless there is a compelling reason to do so, keep your oldest account open.

Maxing Out Your Credit Card Balance

When you max out your available balance, your credit score suffers. Your available credit is the amount that you can charge to the card. For example, if you were approved for a credit limit of $3,000, then you can make purchases totaling $3,000. However, keeping your credit utilization below 30% of the available credit will show creditors that you know how to utilize credit responsibly and that you are not in financial trouble. When you max out your credit cards, you appear riskier to creditors because it appears that you need all the available credit.

Fearing Credit

Some individuals view credit cards as dangerous and equate their use to poor decision-making. While inappropriate use of credit is dangerous, anyone who understands the concepts of credit and executes some fiscal discipline (such as adhering to a budget) will benefit from having and utilizing a credit card. The primary way to build your credit is to open a credit account and make your payments on time. Doing so shows creditors that you are responsible and not a credit risk. Creditors want to avoid consumers who are at risk of defaulting on their payments, which is why credit scores and credit reports are evaluated when deciding whether to approve your credit application. Credit cards are beneficial. They offer fraud protection and rewards, such as cash back, on your everyday purchases. Keep your spending within your budget and pay off the balance every month. If you follow these guidelines, then you can enjoy the benefits.

Conclusion

Credit cards are beneficial tools. Learn the common pitfalls and you will be able to maximize the benefits received, avoid paying interest, and build your credit score. The common credit card mistakes include carrying a balance, paying the minimum payment due, missing a payment/not paying on time, applying for multiple credit cards in a short period, closing your oldest account, maxing out the balance, and fearing credit. Understand how to avoid these mistakes, and you will maximize your credit card benefits.