Credit cards can damage your credit and finances if you use them irresponsibly. You can benefit from credit card use, but you’ll need to steer clear of pitfalls that can harm your credit, like falling behind on your payments or using too much of your credit limit.
Here are the 10 worst credit card mistakes everyone should avoid.
1. Submitting Too Many Applications
When you get a new credit card, the issuer may do a hard credit check on your credit report. Hard inquiries can damage your credit score by up to five points. So, if you submit several applications in a short period of time, you can seriously hurt your credit score. Also, when you have multiple hard inquiries on your credit report, creditors may consider you to be a high-risk borrower.
2. Only Paying Your Minimum Payment
Although you aren’t required to pay your balance in full, it will be more difficult to repay your debt if you only pay your minimum payment. When you only pay the required minimum, the balance you carry over to the next billing cycle will be charged with interest. These charges can accumulate quickly, especially if this repayment pattern becomes habitual.
3. Missing Your Monthly Payments
You will face a lot of consequences if you miss your payment due date and pay your bills late. For one thing, you will need to pay late payment fees on top of the interest charges for your unpaid balance. Your payment history makes up 35% of your credit score, so you can seriously hurt your credit score if you fall behind on your payments.
Credit card issuers report your payment history to the consumer credit bureaus, and a missed or late payment can damage your credit score. If your account is delinquent by more than 60 days, your credit card issuer may also increase your interest rate and charge a penalty annual percentage rate (APR) of 29% or higher.
4. Maxing Out Your Credit Card
When you max out your credit limit, your credit utilization ratio will increase. This can negatively impact your credit score because 30% of your credit score is based on how much of your available credit you use. The ideal credit utilization ratio is less than 30% but greater than 0%.
When you max out your card, you also risk exceeding your credit limit, which could trigger an overlimit penalty. Even if you maintain a balance just below your credit limit, you could still end up over your limit once issuers apply finance charges to your account. This can cause lenders and creditors to consider you as a high-risk borrower when they evaluate your credit usage.
5. Misunderstanding Introductory 0% APRs
Introductory 0% APR offers have a corresponding list of terms and conditions. 0% APRs only last for a limited period. It’s vital to know when your 0% promotional rate ends because any unpaid balances will be charged with the card’s regular APR.
You should also know what types of transactions are eligible for the 0% introductory APR offer. Some introductory 0% APRs only apply to purchases or balance transfers while the best apply to both. Cash advances, which is when you withdraw cash from the ATM using your credit card, are not included in 0% APR promotions.
6. Ignoring Your Credit Card Statement
If you ignore your credit card statement, you may not know your statement’s due date, the required monthly minimum payment, and how much credit you’re using. This information is essential if you want to maintain a good credit standing. It’s a good practice to review your credit card statement thoroughly every month.
7. Closing Old Credit Card Accounts
Closing an old credit card may not be a good idea, especially if you had that card for a long time. Retaining a long-term account can build your credit history and improve your credit score. A better option is to leave your credit card open even if you don’t use it. Your credit card’s limit will lower your overall credit utilization ratio, which is a good way to boost your credit.
8. Forgetting to Report a Lost or Stolen Card
When your card is lost or stolen, you should report it to your issuer immediately so you’re not held liable. If you don’t, you may be held liable for the fraudulent transactions charged on your credit card. You can typically report a lost or stolen card through your online banking portal. If you’re having trouble, contact your issuer directly for assistance.
9. Allowing Your Card to Get Charged-off
A charge-off is a negative mark on your credit report, which will remain for seven years from the date your account is charged-off. If your credit card account is 180 days delinquent, credit card issuers will charge-off your account. You’ll no longer be able to use your credit card, but you are still liable for your debts.
If you settle or pay the charged-off balance in full, the status on your credit report will be updated to either “settled” or “paid.” However, it will remain on your credit report for seven years before you can negotiate with the issuer to have it removed.
To prevent your account from getting charged-off, it’s important to make at least the minimum payment on or before your monthly due date.
10. Making Unnecessary Purchases
One of the most common mistakes many credit card users make is using their card for unnecessary purchases. Some people fall into a debt trap because of irresponsible spending habits. To avoid this, it’s important to practice self-control when using your credit card.
Review your billing statement each month and see which purchases are not truly necessary. To avoid spending beyond your means, create a monthly budget plan and indicate which types of purchases you’ll charge on your credit card. Make sure you only buy what you can afford to repay.
A credit card can boost your credit score when you use them responsibly. They offer the convenience of cashless shopping and the chance to earn rewards while spending. However, credit card mistakes, such as maxing out your card or not checking your monthly statement, can damage your finances and have a negative impact on your personal credit score.