Avoid these 7 common credit card mistakes to improve your credit score, avoid debt & fees. Learn how to use credit cards responsibly & stay financially secure
Have you ever used a credit card because it was your last hope to buy groceries until your paycheck was to be deposited three days later? Or had to use your card to pay for an emergency repair to your automobile that was your sole means of transportation to get to your job on time – or get fired?
The point – sometimes having a credit card can be a financial life saver.
Though many wealthy financial advisors and influencers tell their clients and followers that they should never have or use a credit card, most people don’t listen to them. This is why, according to the Federal Reserve Bank of New York, Americans’ total credit card balance was $925 billion in the third quarter of 2022.
We’re not going to tell you not to keep or use your credit cards. Instead, we will point out some mistakes just about everyone makes with credit cards and how to avoid them.
Here are seven common credit card mistakes most people do
Carrying a balance month-to-month.
One of the biggest credit card myths is that carrying a balance improves your credit score. That is false.
Carrying a balance not only injures your credit, it costs you money.
Studies have shown that the lower your “utilization rate” of your credit-card, the higher your credit score.
Your “utilization rate” is the amount of debt you have compared to your available credit. So, if you have a $10,000 limit on your card and a $5,000 balance, your utilization rate is 50%.
High achievers, those with credit scores of at least 800, on average use only 7% of their available credit and avoid paying all of that interest people with higher balances pay.
Use a creditcard? Pay it off in full every month. Keep your utilization rate low, and you’ll have a better credit score to qualify for a mortgage or obtain a loan with a lower interest rate.
Missing a payment.
Missing even a single payment can kill your credit score.
You can expect a drop of 17 to 83 points for a single 30-day missed payment and a 27 to 133-point decrease for a 90-day missed payment. In addition, you may incur late fees or be penalized with a higher interest rate.
Prevent missing payments by setting up autopay to ensure your payments are always made on time. At the least, set up calendar reminders and email notifications.
Taking out a cash advance.
It can be tempting when you get that email or snail mail from your credit card company promoting using your card for a cash advance. They make it sound so easy to take a stroll to the closest ATM and tap into your credit limit.
Resist the temptation because it comes with a pretty heft cost. Unlike regular credit card purchases, interest starts to accrue on cash advances immediately – there is no grace period.
And you’ll probably rack up a cash advance fee, which can be as much as 5% of the advance amount. That’s a lot heftier than your standard ATM transaction fee.
Maxing out your credit card.
Remember the utilization score we discussed that can hurt your credit score by being too high? When you max out your credit card, your utilization rate spirals upwards to 100%, which is another credit score killer.
If you find yourself charging close to your credit limit each month and have no trouble paying it off, call your credit card company and ask for a credit increase. If they don’t cooperate, don’t cancel that card. Instead, get another card from a different company and keep your utilization rate lower on both cards by charging expenses on both.
Applying for new credit cards too often.
Every time you apply for credit of any type, including a new credit card, a new inquiry appears on your credit report. Having one new inquiry every six months is not a big deal for your credit score. But apply for a couple in the same month or quarter, and you raise a red flag to lenders.
If you need to apply for a new card or two within the first six months, use pre-qualification forms to see if you’ll qualify for a card without damaging your credit.
Closing a credit card.
The average length of time you’ve had credit is an important factor in determining your credit score. When you close a card, the average length of your credit history is negatively affected.
For example, if you’ve had one credit card for six years and another for two years, you’ve had credit for an average of four years. If you close the card you have had for six years, your average age of credit drops to two years.
Not reviewing your monthly billing statement.
Mistakes happen all the time with credit card billing. For example, the amount charged is wrong, there are duplicate charges, and sometimes fraudulent charges are added.
At the very least, review your monthly statement for errors. Better yet, check your transactions a few times every week to verify that everything is as it should be. Be proactive to spot fraud and mistakes early and resolve incorrect charges.
How many credit cards are too many?
If you use your credit cards responsibly and never carry a balance, no number of cards is too many.
But if you use your credit cards as a way of supplementing your income, and you’re carrying balances month-to-month, then one card may be too many.
Which of these two categories do you fall into?
Remember, credit scores can be improved over time. Avoid these seven mistakes and use credit cards as a tool, not a crutch.