Ten Common Credit Cards Mistakes and How to Avoid Making Them

Ten Common Credit Cards Mistakes and How to Avoid Making Them

Credit cards are not just convenient. They’re also an important part of establishing a healthy financial profile. Using credit cards judiciously, selectively and responsibly is a major component of building good credit, which can ultimately qualify you to make larger purchases like a home or automobile. Not only that, but many credit card offers come with great opportunities for savings as well as an array of perks and benefits like frequent flier miles and cash-back points on all purchases. In spite of these benefits, credit cards can also be dangerous when wielded incorrectly.

Using credit cards frivolously, excessively or without discretion can damage your credit rating, leave you swamped in debt, bury you in interest payments, and even disqualify you from making important major purchases such as those cited here above.

If you are new to the world of credit purchasing, we would advise that you begin with a look at The 10 Biggest Mistakes First-Time Credit Card Users Make.

For those who aren’t necessarily new to credit cards but could use a bit of a crash course in best practices, read on. And don’t feel bad. These are common mistakes that many consumers make, even those with a long history of credit card use. But it’s never too late to start using your credit card(s) responsibly. You can start by avoiding these 10 Common Credit Card Mistakes.

1. Failing to Comparison Shop
The very first step in responsible credit card usage is finding a card offer that actually suits your needs. Your existing credit background will play a part in determining the offers for which you are eligible. Your history of credit spending and payment, as well as your overall credit score, will help to determine both the credit limit for which you qualify and the interest rate you’ll be required to pay on spending.

With hundreds of potential credit card offers available to you, the best way to narrow down your choices is to first determine exactly how you plan to use this card. Citizens Advice suggests that if you plan to use your card for regular purchases while paying off your full balance each month, your long term interest rate won’t be of major consequence. In that case, you might want to seek out cards that specialize in discounts, benefits, and cash-back offers. On the other hand, if you plan to use this card to pay off big purchases like hotel stays, flights, or major appliances over time, you may want to choose from cards with low interest rates (especially those with an introductory rate of 0% APR).

Once you’ve narrowed your selections down based on your intended use, pick three or four offers and compare them across a few basic specs including the Annual Percentage Rate (APR); the annual fee for card usage; any additional charges or fees that might be incurred through regular usage; special offers regarding introductory or long-term interest rates; and loyalty points or rewards like travel discounts, frequent flier miles, and cash back on spending. Make sure you consider all of your options. This puts you in the best position to secure an offer that matches your needs and financial goals.

2. Carrying a Balance
Ideally, you would only use your credit card when you are in a position to pay off your balance in full during the next billing cycle. It is a popular misconception that carrying a balance forward can help to build positive credit. According to CNBC, “One of the biggest credit score myths is that carrying a balance on your credit card improves your credit. In fact, 22% of Americans carried a balance thinking it would increase their credit score.”

This is not accurate. The reality is that a lower balance is always better, and a zero balance is best. Carrying a balance from month to month can have two negative consequences. First, sustaining a balance can negatively impact what is known as your credit utilization ratio. This is the total sum of your debt in proportion to your total available spending limit. The lower credit utilization ratio, the better your credit is likely to be. To the contrary, the more of your available credit that you are currently using, the lower your credit score will be.

In fact, CNBC notes that those consumers who are considered “high-achieving” credit users typically carry a balance equal to no more than 7% of their available credit. Not only that, but any balance you carry will result in higher interest payments. If your balance is high enough, those interest payments will very quickly eclipse any discounts, benefits or rebates you might enjoy as a cardholder.

3. Reaching Your Credit Limit
While we advise paying off your balance in full here above, we also recognize that this is not always possible. Indeed, the very reason you open a credit card may be to provide yourself with some financial flexibility as you pay for big ticket items. But if you must carry a balance, you should do so with a clear sense of your credit limit. This is the maximum sum of your borrowing power, and while you have full access to that amount, it is never advisable to “max out” your credit card.

Using the full amount of your credit limit can damage your credit score and result in high interest payments. Once again, this is because, according to Capital One, “a portion of your credit score depends on the amount of credit you’re using compared with what you have available. This is known as your credit utilization ratio. According to the CFPB, getting close to your credit limit could hurt your credit scores. They say experts advise against using more than 30% of your total credit limit—across all accounts.”

If you absolutely must use a credit card to make a large purchase, inquire about raising your credit limit. Raising the ceiling on what you are eligible to borrow can improve your credit utilization ratio. But of course, you should only raise your credit limit with caution. Don’t treat this as a license to grow your balance. The goal is to improve your credit score, not to promote more credit card spending.

4. Making Minimum Payments
Don’t misunderstand us. You should absolutely make the minimum payment every month, at least! But you should also always pay more than the minimum. Nerdwallet points out that making the minimum payment on your credit card balance each month will help to keep your account in good standing and it will prevent you from incurring any late fees. But that, says Nerdwallet, is literally all you will accomplish by paying only the minimum. Unfortunately, you will likely make little to no progress on cutting down your debt or avoiding the incursion of interest fees…..Read More

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