Want to use your credit cards wisely? You need to stop making these mistakes right now.
Woman's hands holding a credit card while typing on a laptop.
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Credit cards are great -- when used properly. You can earn generous rewards for spending you’d have to do anyway and can more easily track what you’re spending money on by reviewing your credit card statement. You can also get bonus perks from your credit card, such as car rental or travel insurance or access to fancy airport lounges.
But, if not used properly, credit cards could be a gateway to financial disaster. You could end up in debt, paying thousands of dollars in interest, and wrecking your finances if you make credit card mistakes.
You don’t want your card use to derail your financial goals, so stop making these four credit card mistakes right now.
1. Carrying a balance on a credit card
Credit cards have pretty high interest rates in most cases. Unless you’ve got a card with a 0% promotional APR currently in effect, you’ll probably have to pay at least 13% interest. And, in most cases, interest on credit cards compounds daily. This means the interest currently accrued is added to your credit card balance at the end of each day so each day you pay interest on a slightly higher balance.
If you pay off your credit card bill when you get the statement each month, you don’t have to pay interest. But, if you don’t pay the bill in full, you’ll owe interest -- and you’ll owe a lot of it thanks to the high rate and the fact that interest compounds daily.
If you constantly carried a $2,000 balance on a credit card at 15% interest compounded daily, you’d end up accruing $323.60 in interest over the course of the year. That’s a lot of money to waste because you didn’t pay off your bill.
Instead of spending a fortune in interest, only charge things you can pay back in full by the next time your bill is due.
2. Paying your bill late
When you charge anything on your credit card, you’ll receive a monthly statement and will be expected to make at least a minimum payment by a set due date. This minimum payment usually equals a percentage of what you owe, such as 1.5%, or a set amount, such as $25.
If you don’t send in your payment when it’s due, you’ll usually have a grace period of a few days. But, once that grace period has passed, you’ll be charged a late fee. In 2019, you could be charged as much as $28 for the first late payment and as much as $39 for each additional late payment within six months.
Not only will you incur a late fee, but you could also trigger a penalty interest rate. This means the credit card company will raise your rate -- often to around 29.99% -- and this increased rate will typically apply to your current balance and any future purchases.
This penalty APR usually remains in effect for a while. Credit card companies will need to reduce the rate back down on your existing balance after six months of on-time payments, but can keep the penalty APR in effect forever on future charges.
Paying late can also mess up your credit score, as a 30-day delinquency could drop a good score by more than 100 points. If your credit score falls, you’ll pay more for all your future borrowing and some people -- like landlords -- may not want to do business with you at all.
3. Maxing out your credit limit
When you have a big line of credit, it may be tempting to charge as much as you can. The problem is, if you max out your credit cards, you’re going to hurt your financial situation. That’s because your credit utilization ratio is one of the most important factors in determining your credit score.
Your credit utilization ratio is a number that reflects how much of your available credit you’ve already used. Ideally, this ratio will be very low if you want the best credit score. A utilization ratio above 30% can reduce your score substantially, but you should try to keep the ratio well below 30% if you can.
If you max out your credit cards, you’ll have a very high credit utilization ratio. If you have a card with a $10,000 line of credit and you’ve charged $10,000 on the card, your utilization ratio is 100%. Even if you pay off $1,000 and bring your balance down to $9,000, you’re still at a 90% utilization ratio -- which is well above the recommended 30%.
If you hurt your credit score with a high utilization ratio, you may be denied other financing or the ability to enter into other transactions, such as renting an apartment. Maxing out your credit cards could also lead you to charge so much that you go over your credit limit and are hit with an over-the-limit fee.
4. Applying for lots of new credit cards
Opening new credit cards might seem like a good idea if you want to avoid using any one card too much and getting close to your card limit. But, in reality, opening a bunch of credit cards can be bad news.
Every time you apply for credit, an inquiry is placed on your credit report. It stays there for two years. Too many of these inquiries reduces your credit score. You can also hurt your credit in another way by opening new cards frequently. Doing this reduces the average age of your credit.
Average age of credit is calculated based on how long you’ve had all your accounts open. Since lenders prefer customers who have a long credit history, a longer average age of credit means a higher score. If you’ve opened a new credit card and you now have an account open for zero years factoring into your average, your average will naturally be much lower.
Finally, opening a lot of credit cards can mean you have more credit available. This can be a bad thing if having so much open credit tempts you to charge more and leads you into debt.
If you have just one or two cards, each with a small credit line, you can’t usually get yourself into too much financial trouble because it won’t be possible to charge a fortune you have to pay back. But, if you have five cards with tens of thousands of dollars in available credit, this could be a recipe for financial disaster if you don’t use the cards responsibly.
Avoid these credit card mistakes to protect your money and your credit score
Avoiding these credit card mistakes doesn’t have to be hard. Just commit to not charging more than you can pay off in full each month, to keeping your credit utilization low, and to paying your bills on time. If you refrain from opening a bunch of new cards or maxing out the cards you have, you should be able to build a positive credit score and can use credit cards wisely to get rewards without owing interest.
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