Remember when you got your first credit card? It was an exciting experience, wasn’t it? The mall seemed more attractive than ever and everything seemed to be within your reach. But then one year or maybe two years down the road, having a credit card was no longer so much fun.
Credit cards are great to pay for expenses and build a credit score. Unfortunately, we don’t use them correctly and end up hurting our credit score. And the worse that could happen is having a credit debt.
If it’s your first credit card or you are looking for advice to stay out of trouble, avoid these credit card mistakes:
1: Carrying Balance
Most Americans carry their credit card balance with the hopes that it will improve their credit score. No! This is not how it works. Carrying balance month to month is bad for your credit score. Plus, it costs extra money.
This extra balance means you will have a higher credit utilization rate. Carrying a balance is also expensive because of interest charges.
2: Being Unaware of the Benefits of Credit Card
Credit cards are packed with perks so dig them up. Cards from companies with great net worth like Wells Fargo and American Express have some awesome perks. For instance, if you use your card for paying your phone bill, Wells Fargo offers $600 insurance coverage.
The more you know about your card’s perks, the more value you will get. Check the agreement to learn about the benefits. Some offers are time-sensitive. Keep on checking the card issuer’s website for the latest deals.
3: Making Minimum Payments Only
It’s a must to pay the minimum amount at least if you can’t pay the entire balance but don’t make this a practice. Not paying the bill in full throws you in the pothole of debt and racks up unnecessary interest.
Paying the minimum amount just keeps on adding to the debt. It would take you months or years to pay off the entire debt. Before using your credit card for big payments, have a payment plan ready.
4: Missing a Payment or Two
Late or missed payments hurt the credit score especially if you are more than 30 days late. Penalty internet rate or late fee charges might apply but if you pay within 30 days grace period, a missed payment won’t be reported to the credit bureaus.
5: Not Reviewing Your Billing Statement
Always review your billing statement at the end of the month. You never know there’s an error or fraudulent transaction. Stay proactive and verify everything that appears on your account to spot fraud/incorrect charges at the earliest.
6: Taking a Cash Advance
The biggest risk on a credit card is taking a cash advance. The moment you withdraw cash, the interest rate starts accruing. And there is no grace period like it’s in the case of regular purchases. On top of the interest rate is the cash advance fee which can be up to 5%.
7: Having a Low Limit Credit Card
Some consumers who don’t like credit cards apply for the one with a lower limit such as $5000. They often keep one card only. This means if you use this card to make one sustainable purchase, 50% of your credit limit will be consumed right away. This could leave a negative impact on your credit card. What if you are faced with an emergency and you have to rely on the credit card?
Never have a balance greater than 20% of the credit limit. Most of all, never sign up for a credit card with a lower limit. It’s safe to have at least 3 cards and keep one for business expenses only.
8: Maxing Out the Card
It’s never a good idea to consume all the credit limit and max out your card. This will spike the utilization rate and damage your credit score. In another scenario, if you reach close to the limit each month but you can pay off the entire bill easily, call your card issuer for increasing the credit limit.
9: Closing the Credit Card
The length of time you owned a credit card is an important factor in making up the credit card. When you close a credit card, your history is affected.
Financial experts recommend not to close a credit card especially if it’s your oldest. Close it only when it’s mandatory such as higher annual fees, interest charges, or poor benefits.
10: Introductory APR Offers
Most credit cards come with 0% APR offers. This is just for a limited time. Many consumers neglect the fine print that states the ending period of the offer and ends up in debt.
It would be wise to be responsible and develop good habits to stay out of financial troubles when using your credit card.