Are You Making These Common Credit Card Mistakes?

What’s the first thing that pops into your mind when you think of a credit card? Is it the convenience of cashless transactions? Is it the high-interest rate and perpetual cycle of debt? Whatever you think about credit cards, the fact remains that they are an important tool for maintaining good credit. Since you (probably) have at least one or two in your wallet, it’s important to make sure that they are being used appropriately. Let’s talk about how to do that and how you can avoid making common credit card mistakes that can seriously affect your credit score.

If you have been reading this Blog for any length of time, you already know my stance on credit cards. In fact, you’ve probably seen me post about our VISA Rewards Credit Card with all of the bells and whistles that the big banks have, only this is better. I’ll spare you the fine details, but if you want a refresher, you can read this post or this post. Aside from focusing on our card I’ve also talked about credit cards in general, and how using them responsibly can be a game-changer to your credit - - particularly, if you are building your credit from scratch, or if you are re-establishing credit after a setback. We can’t go much further in this discussion without doing a quick overview of credit reports and the factors which determine your credit score.

A credit report is a sort of personalized financial scrapbook. It contains bits and pieces of the transactions that you have made throughout your adult life. Sure, you aren’t going to see every pack of gum or gallon of milk you’ve ever bought, but if you have used credit to pay for those purchases, you will see a monthly breakdown that accounts for the balance and repayment. Paying at least the minimum amount owed on time will keep your account in good standing and help increase your credit score. Revolving debt, like a credit card, is not the only factor considered when determining your credit score. Other types of debt are important indicators that you are using credit/debt responsibly. Those factors include debt utilization (or how much of your credit limit is being used versus how much is available to use) and length of credit history. For a more detailed look at credit reports, you can read this Blog post.

As this is a post about credit cards, let’s get down to business and review the common mistakes that cardholders make, so you know how to avoid them.

Mistake #1: You are NOT making on-time payments by the due date. Keeping up with your payments is absolutely critical in maintaining good credit. Missing payments can seriously knock down your score and can make other lenders think twice about approving future loan requests. Delinquent payments will report to the credit bureau after they reach the 30-day point but always try to avoid paying past the due date. Late fees and interest will continue to accrue, and, if you have special financing, like 0% for a specified term, the credit card company may cancel it, which ultimately means you will end up paying more.

Mistake #2: You are maxed out. You have a $1,000 credit limit, so it’s time to splurge on that $999 television, right? WRONG! Maxing out a credit card has some incredibly negative consequences. It’s pretty much the worst thing you can do. For starters, if you need your card, you don’t have availability – bummer. Second, and more importantly, your credit score factors in your debt utilization. If you are at (or over) your credit limit, your score will plummet. For the most positive impact on your credit score, keep the balance at or below 20% of the limit. Remember  - just because you have a higher credit limit available to you, doesn’t mean you should use all of it.

Mistake #3: Know your terms. Before you apply for your card, do your research. Make sure that the card meets your needs. For instance, does it have an annual fee? If so, how much? There are plenty of cards on this planet – many of which do not charge an annual fee. There may be a better card for you. You need to pay close attention to the interest rate, introductory or promotional offer, whether the rate is fixed or variable, what the maximum rate might be, fees and penalties for late payments, balance transfer fees, and how the payment is calculated. Pay extra attention to the cash advance terms. At 18, when I was new to the world of credit cards, I didn’t realize that the rate charged for a cash advance was different than my standard rate. What a surprise! Don’t make my mistake.

Mistake #4: Check for errors. It is easy to be complacent when your credit card statement arrives each month. Don’t do that. Be sure to review your transactions and interest. The people that work at your credit card company are human, and sometimes, mistakes are made. Catch them early and save yourself the money and stress!

Mistake #5: Too many cards. If you took advantage of every credit card offer that was sent to you, you would have a wallet full of plastic and unfortunately, a lower credit score. Having a large amount of new credit decreases your age of credit. This means that lenders will think you are a higher-risk borrower – not good when you are hoping to improve your score or apply for a  mortgage down the road.  Try not to apply for credit unless you really need it.

Mistake #6:  Only making the minimum monthly payment. Okay, so this isn’t entirely related to your credit score, but it is a mistake that you don’t want to make. In a pinch, making the minimum monthly payment will help keep your credit on track, but the best thing that you can do is to pay more than the minimum.  Why? You will save money because you are paying your balance down sooner. Be sure to look at the table that is included on your credit card statement (like the one below) to see how paying above that minimum payment helps you pay your balance down sooner.

In addition, credit card companies like to see that you are a responsible borrower. Paying off the balance owed each month, or carrying a small balance for a short period of time to build credit is a reflection of responsibility. Plus, living beyond your means is a budgeting no-no.

Do you have questions about credit cards and your credit report? Leave a comment below or email me.

Krista Kyte is a personal finance blogger and personal banker with over 18 years of experience in the financial industry. Krista is passionate about helping our members understand their financial situations. She writes tips that will help consumers reach and maintain financial security, and start living the life they’ve always wanted.