When used correctly, credit cards can offer a great way to build your credit score and enjoy benefits that can save you money over time. When they’re misused or misunderstood, however, credit cards can put you in deep holes of debt or even cause financial ruin.
To make sure you don’t end up in this category of credit card owners, it pays to be aware of what not to do when it comes to responsibly owning and operating your credit card.
By understanding some of the most common and potentially destructive credit card problems, you’ll be equipped to avoid these pitfalls and stay on top of your month to month personal finances.
1. Getting Close to Your Credit Limit
Unless you are prepared to use your credit card on things you will be able to pay off at the end of each month, you may want to consider avoiding credit altogether if you can. Nearly nearly one-fourth of all Americans owe more than $3,000 on their credit cards, and many are not able to make more than the minimum payment.
Much of the problem stems from the temptation a credit card can bring for overspending or buying unnecessary items simply because you can. Having a strong sense of your personal spending habits and taking a few steps to create a budget are great strategies to make sure you don’t let your credit card costs get the better of you. Remember, don’t use your credit card to pay for things unless you can genuinely afford them in the first place.
2. Only Making Minimum Payments
Paying off what you owe each month is a great credit card tip to make sure your interest doesn’t get out of control and also prove to the credit bureaus that you’re capable of handling your credit responsibly. This is one of the main ways to improve your credit score and also to enjoy credit card rewards like travel points without falling prey to high interest rates.
One good way to do this is to dedicate one specific credit card for each of your monthly payments. For example, your monthly cell phone bill, gas, groceries and entertainment costs could all have their own credit card. This allows you to build your credit card spending into your monthly budget and set automatic payments so you won’t fall behind.
Keep in mind that building credit can take several years of making responsible payments, but even just one missed payment can do significant damage if you lose control of your spending.
3. Applying for Too Many Cards at Once
Another frequently seen credit card problem involves opening more lines of credit than you can manage or keep track of at a single time. In many cases, there are several good reasons why you should have more than one credit card. One of these reasons is because having access to more credit may be a way to boost your credit score. However, there is a right and wrong way to go about having multiple cards.
In most cases, applying for a credit card involves a process called a “hard inquiry” on behalf of the credit card issue. Hard inquiries lower your credit score, so applying for too many cards, loans, etc. could take a big chunk out of your score.
Knowing this, it’s a good practice not to apply for a credit card unless you truly feel you’re likely to be approved, as denied applications may bring a hit to your credit with nothing positive to show for it.
4. Using Too Much of Your Credit Limit
An important credit card usage tip that many people aren’t aware of has to do with your credit usage. Aside from simply making your monthly credit card payments on time each month, how much of your available credit that you use can also play an important role in your credit report and credit score.
Generally speaking, the less of your total available credit you use, the better. This percentage is known as your “credit card utilization ratio,” and it can play a part in determining the quality of your credit. A good rule of thumb when it comes to keeping your credit card utilization ratio in line, is to aim for using less than 30% of your total available credit limit at any time.
5. Carrying Over a Balance Over Several Months
Making your credit card work for you means avoiding expensive interest fees that can build up over time from only making minimum payments each month. The best way to keep costly interest fees from building up is to pay your credit expenses in full each month.
Paying off your bill each month basically gives you an interest-free loan on all of your expenses. This will keep you from being overwhelmed by debt, reflect positively on your credit report and provide you with perks and rewards.
If you are swamped with a heavy balance that you’re having trouble paying down, applying for a balance transfer card may be one alternative that can help you get your credit card expenses back under control.
6. Not Shopping Around or Having a Strategy in Place
Unless you give yourself the best chance from the very start to acquire a credit card that’s right for you, it’s may be more likely that you could run into unforeseen problems down the road. Another common mistake people often fall victim to is not doing their due diligence in examining all their options before applying for a credit card.
Remember that applying for a new card lowers your credit score temporarily. Additionally, closing a credit account also lowers your score. This means that when you are approved for a credit card, you are making a long-term commitment.
Therefore, if you become committed to a credit card that doesn’t offer the right benefits or work well with your budget, you could end up leaving money on the table or even being forced to cancel it early. Instead, look for cards with different types of incentives, perks and rewards until you find the one that’s right for you.