Credit cards can be powerful tools for building credit and reaping the rewards they bring, yet misusing credit cards can have adverse effects on both your finances and credit history. Excessive use can lower your score, result in expensive interest rates and put you on the path towards debt.
Understanding how to avoid common credit card mistakes is vital in order to reap all of the advantages offered by credit cards without incurring any potential repercussions.
1. Don’t carry a balance
Credit cards can be an effective tool if used responsibly, helping build credit history while reaping the rewards such as cash back or frequent flyer miles. Unfortunately, however, many Americans fall prey to false beliefs regarding credit cards that can cost them money.
One of the costliest mistakes you can make with your credit card is carrying a balance from month to month, which will lead to interest charges being applied. To avoid paying these interest charges and enjoy a grace period where no interest will be levied on that balance, always pay it in full by its due date every month – otherwise interest charges could accumulate quickly, placing you further into debt than needed.
Keep in mind that credit card companies report your credit utilization ratio to major credit bureaus, which will then be used to calculate your score; this has no bearing if your balance is paid in full; what has more of an effect is on-time payments; keeping a high utilization ratio can harm your score, so ideally try keeping it under 30%.
Deliberately carrying over your balance from month to month can cause you to spend beyond what is financially possible, leading to serious financial troubles. As credit card interest compounds daily, it will quickly add up over time. When your purchases add up to thousands in debts owed each month when you carry a balance over from one payment cycle to the next, interest costs become exponentially more costly and lead to serious problems financially.
Not using your card responsibly can be costly; use it only when absolutely necessary or to stay afloat until your next paycheck arrives. Responsible cardholders plan their purchases carefully so they can pay for them with their income; use their credit card only as an emergency backup to cover unexpected expenses or occasional indulgences that won’t break their budget. By following these tips, you can avoid common credit card mistakes and start building an excellent credit history.
2. Don’t overspend
Credit cards can be an effective tool to build long-term financial goals, but misusing credit cards could cost you dearly if used improperly. From carrying a balance to paying excessive interest charges or missing payments altogether – making mistakes with your card usage can seriously harm your finances in ways you wouldn’t expect.
Credit cards often offer tempting perks such as cash back, rewards points and travel miles that tempt consumers into overspending their budgets. Unfortunately, these perks often outweigh any savings gained by not having to withdraw cash outright; thus resulting in additional purchases adding up over time into a large debt bill that becomes difficult or impossible to repay over time.
Avoid overspending on a credit card altogether or make only purchases that you can pay off within one month after they hit your bank account. If your spending habits seem out of control, YNAB’s “Available” category may help monitor them more closely.
If your credit card overspending keeps adding up, it could be an indicator that core expenses such as food, utilities, and insurance aren’t being adequately funded. In such instances, finding ways to cut costs or increase income could help get back on track.
Not necessarily! Although credit cards may seem convenient, if you find yourself overspending it may be best to limit or stop using them until your budget is in balance. This will reduce accidental missed payments or incurring late fees that damage your credit score; alternatively if credit cards have become your main form of payment in other areas such as grocery shopping or entertainment it might be wiser to switch back over.
3. Don’t miss a payment
Credit cards can be an indispensable tool in helping to manage your finances, yet misusing them incorrectly can put immense financial strain on yourself and result in high interest rates, late fees and diminished credit scores. However, many of these mistakes can be avoided simply by following some best practices.
One of the most frequent credit card mistakes people make is missing payments, whether through forgetfulness or not having enough funds available in your bank account to cover it. To help avoid missing a payment altogether, it’s essential to set up a system which reminds you when payments are due, such as signing up with your card issuer for reminders directly or downloading apps that send notifications of upcoming due dates. You could even work with them to adjust your due date so it coincides with payday or other forms of income.
Missed credit card payments have varying consequences depending on how late and for how long. Usually, there will be late fees and charges on any purchases as well as damage to your credit score; if your history of payments has been good however, single missed payments typically don’t affect it too significantly as card companies usually only report missed payments 30 days past their due dates to major credit bureaus.
But missing payments on a regular basis or having trouble keeping up with monthly payments can become more problematic, so it is best to contact your card issuer as soon as possible and attempt to negotiate an agreement and repayment plan with them in order to prevent a credit crisis and preserve good standing accounts, ultimately improving your score in the process. Furthermore, Money Fit suggests seeking help from financial counselors as a means of returning your finances back on solid ground.
4. Don’t close a card
Reducing debt and maintaining an optimal credit utilization ratio is possible through canceling credit cards, but you should understand all of their repercussions before taking this step. Credit card companies won’t let you close an account with an outstanding balance – they will hold you responsible until these charges have been cleared up completely and any rewards yet unclaimed may also disappear from your wallet.
If you’re thinking about closing one or more cards, it is best to call their issuers instead of closing online. Ask to speak to a representative and explain your situation; perhaps they can offer an increase on another card so as to lessen any impact of closing this particular one on your utilization ratio (how much debt you owe relative to total available credit).
Before making a decision, it may also be worthwhile consulting the free credit score simulator provided by WalletHub. This can give you a rough idea of how card closure may impact your score, helping make an informed decision.
Consider whether the credit card you’re considering closing has an annual fee that’s high; in this instance, keeping it open could be worth your while if you plan on using it occasionally for large purchases or ongoing charges such as membership fees or subscription fees.
Cancelling a card may become necessary when the credit card company makes significant changes to your terms and conditions that you find unacceptable, such as raising interest rates suddenly or changing rewards programs. Such events would warrant cancelling your card.
If you decide to close a credit card, always review all three credit reports between 30 and 45 days post-change to ensure it was done correctly and your scores weren’t adversely affected by its closure. If there are any discrepancies, file a dispute with each bureau as soon as possible.
