Is your credit score stopping you from being approved for a vehicle loan, mortgage, or credit card? Are you wondering what mistakes you may be making that are damaging your credit? Have you moved this question to the bottom of your to-do list because it is simply too stressful?
If you have answered yes to any of these questions, you are not alone. Millions of people struggle with building or fixing their credit. Using a credit card correctly is essential to increase your credit score and stay out of debt. By avoiding the following mistakes, you can maintain your credit and save money in the long run.
1. MAKING ONLY MINIMUM PAYMENTS
Making the minimum payment on your credit card can be tempting because you say to yourself, “Oh, I can just pay the rest later!” Although you should always make at least the minimum payment each month, doing so ends up being more expensive than you may have initially thought. Your credit card statement will give you two standard amounts that you can pay: statement balance and minimum due. The statement balance is the total amount on your card for that specific billing cycle. The minimum due will always be the smallest amount you must pay per the credit card account holder agreement that you signed. Most credit counselors and financial advisors would agree that making the minimum payment will keep your credit card in good standing, but it will leave you with a running balance. This will be explained more in the next section.
2. CARRYING A BALANCE MONTH-TO-MONTH
If you only make a minimum payment or pay less than the entire statement balance, the remaining amount will be carried over to the following month’s statement. The balance that remains on the credit card will continue to accrue interest every month and possibly make it more difficult to pay off the balance. The best practice is to spend only what you can afford to pay off each month. It’s like they say: “Don’t dig yourself into a hole that you cannot get out of.”
3. NOT REVIEWING YOUR CREDIT CARD STATEMENT
This mistake sounds like a no-brainer—why wouldn’t you review a bill that you need to pay? Well, it can happen more often than you think. It is pertinent to check your credit card statement frequently (every few days if possible) because it lists the transactions that have occurred during a specific period. By looking through your transactions, you’ll be able to determine whether all the charges were made by you and you will quickly be able to determine if a merchant accidentally charged you twice or if a fraudster stole your account information.
Most companies offer alerts for account activity. Turning these on will notify you of recent charges to the card, pending payments, payments that have been made, possible fraud, and credit inquiries. These settings can actively help you pay attention to your account activity on a regular basis
4. PAYING LATE OR MISSING PAYMENTS ENTIRELY
Missing a card payment doesn’t feel good. Rather than beating yourself up about it, there are ways that you can avoid missing payments. Some institutions and credit card companies offer a grace period before a late charge is assessed. Some don’t, though, so it is important that you understand the terms and conditions of your credit card agreement. Depending on your card, you may incur other fees or penalty interest charges which could raise your annual percentage rate (APR).
If you are someone who regularly forgets to pay their credit card bill, I recommend setting up automatic payments to pay the minimum, more than minimum, or the entire statement balance. However, you should keep track of your account balances when automatic payments are set up to avoid overdrawing your account. Ultimately, we are each responsible for paying our bills and managing our accounts!
5. NOT READING THE FINE PRINT
You better be ready to take out your magnifying glass to read the fine print. Why should you care about the fine print? The fine print of a credit card agreement addresses topics that can potentially affect you such as APR, annual fees, grace period terms, calculation methods, and any other applicable fees. All credit card companies are required by the Credit Card Act to make this information available to you. It is in your best interest to take the time to read and understand it.
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6. MAXING OUT YOUR CREDIT CARD
Maxing out your credit card can have significant consequences.
A high credit utilization ratio could reduce your credit score. This ratio is calculated by dividing your credit card balance by your credit limit, whether that is one card or multiple. High credit utilization ratios can indicate that you’re experiencing financial hardship and can signal a higher level of risk to prospective lenders. Most credit counselors or financial advisors would suggest keeping your utilization ratio below 30% to maintain a strong credit score.
Another consequence could be that your minimum payment increases—the higher your balance, the higher the minimum payment.
The last possible and most common consequence would be that your card could be declined. When you have reached your credit limit, you have no credit left to spend! But do not worry. You can get your balance back down if you make payments.
7. APPLYING FOR NEW CARDS TOO SOON
I’m not going to lie—the very first time I applied for a credit card, I was declined. I was confused and disappointed, but I resolved to apply about three more times. I never realized this could be a problem!
Applying for multiple cards at once or within a short period of time can hurt your credit score. Each time you try to apply for a card, you are giving that company or institution the authorization to pull a hard inquiry on your credit. Each hard inquiry can drop your credit score anywhere from two to five points. I recommend visiting any of the credit bureau sites such as Experian, Transunion, or Equifax to read more about the differences between soft and hard inquiries.
Different companies offer different credit card products. Research your options and compare interest rates, cash-back bonuses, rewards, and annual fees. Instead of sending applications for more than one at the same time, it’s best to weigh your options and pick the best card for you before applying.
8. CLOSING CREDIT CARDS
Closing a credit card that you no longer use or need isn’t necessarily a bad thing. However, it may not always be in your best interest. The length of time you’ve had your credit card(s) is a key factor in determining your credit score—the longer, more positive credit history you have, the better.
For example, let’s say you have excellent credit with over 10 years of credit history, excellent repayment, and your credit utilization is great with your other credit cards. If the card you are closing is not the longest standing line of credit, closing that credit card will not have that big of an impact. Closing a credit card you’ve had for ten years may have a larger impact, though, and may be more difficult to recover from.
There are some reasons why closing a credit card could make sense for you, such as high annual fees, poor benefits, extremely high-interest rates, or if you’re struggling to pay back your debt. If you close a card, your score can bounce back within a few payment cycles by making your payments on time with your remaining credit cards.
Hopefully reading through these possible mistakes helps you understand how to handle your current or future credit cards. Take the information you have just learned and apply it. You’ll see your credit score increase or stay exactly where you want it to be.
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