Credit cards are a pretty ubiquitous part of most Americans’ personal finances. In fact, according to a recent study by The Ascent, 80% of us have at least one. It’s easy to see why credit cards are so popular — they’re a safe and convenient way to pay for purchases, and many of them allow you to earn cash back and rewards on your spending. Plus, you can easily build credit with a credit card.
Unfortunately, credit cards can also come with a few pitfalls, and if you’re not careful, you can land in credit card debt or damage your credit score. If you’re new to credit cards or just need a little primer, here are five mistakes you don’t want to make.
1. Carrying a balance
Unless you have a charge card, you’re allowed to carry over a balance on your credit card from month to month. This isn’t a good idea under most circumstances, though. If you have a credit card with a 0% intro APR financing offer, and you’ll be able to pay off your balance in full before interest is charged, that’s fine. But under normal circumstances, credit card interest is very, very expensive — as of this writing, the average APR for a credit card is 24.72%, according to Forbes.
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Do this instead: Aim to pay off your entire credit card balance every month. It’s good to get in the mindset of remembering that credit cards represent borrowed money, and try to only charge what you can afford to pay for with your own money. Some people pay off their credit cards monthly, but I try to take mine back to a $0 balance every week — it’s a lot better for my own peace of mind.
2. Making only the minimum payment
When you only make the minimum payment on your card, you’ll end up carrying some of your balance forward, which means, yep, those expensive interest charges we just discussed. You should be careful about this even if your card has 0% APR for a period of time. In this case, the card issuer will also give you a minimum payment, but don’t be fooled! Instead, run the numbers yourself.
Let’s say you bought a new washing machine for $800 and have 12 months of 0% APR. Your card issuer says your minimum payment is $40. But paying only this would leave you owing $320 when the card starts charging you interest. Instead, divide that $800 by 12 months, and you’ll have your actual minimum payment — $66.67.
Do this instead: Again, ideally, you’re paying off your full balance every month, but if you can’t, try to pay more than the minimum owed in order to get yourself out of debt as quickly as possible. And run your own numbers for a 0% APR card to make sure you land on a minimum payment that gets you clear of debt before interest is charged.
3. Using too much of your credit limit
If you’ve got a credit limit of $5,000, you’re allowed to spend that much on the card, right? Technically, yes — but for the benefit of your credit score, no. Your credit utilization ratio is a big part of your credit score. This is the percentage of available credit that you’re using at any given time, and it makes up 30% of your FICO® Score. To keep your score in good shape, it’s best to keep your credit utilization ratio under 30%.
Do this instead: Don’t go over 30% of your credit limit, if you can manage to avoid it. In the case of your $5,000 credit limit, that caps you at just $1,500.
4. Paying late
Another major credit score no-no is paying your bill late. Your payment history represents 35% of your FICO® Score, and speaking from experience again, making all your payments on time, every single month, can save your credit score even if you’re in debt.
Do this instead: If you struggle to remember when payments are due, set an alert on your phone, or do what I do. Buy a wall calendar, hang it where you can see it, write all your monthly bills on it, and then check them off as you pay them. It’s old school, but it works.
5. Canceling old credit cards
You might think that if you’re not using a particular credit card, you may as well cancel it. Not so fast! Closing an old credit card account can ding your credit score eventually (accounts in good standing remain on credit reports for 10 years), because length of credit history is also a factor in calculating it — it’s 15% of your FICO® Score. I canceled an old card earlier this year, but I have excellent credit and thankfully only saw a two-point drop in my score. If your credit score is poor or fair, it’s best to keep the card to avoid the hit.
Do this instead: Unless there is an actual reason to cancel an old credit card (perhaps it has an annual fee, and if you’re not using the card, it’s certainly not worth continuing to pay that), it’s best to keep it open. Maybe make a small purchase with it occasionally to keep the account active.
Credit cards can be an extremely useful financial tool, so it’s worth taking the time to learn how to use them the right way. Don’t worry if you’ve already been making these rookie mistakes — you’re never too old to learn some new personal finance moves.
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