8 Credit Card Mistakes Most People Make...

Credit cards are a great tool for building your credit score, and for providing you with a short term financial boost in case you need it.

You can also earn rewards and bonuses, whilst providing your budget with a bit of extra breathing room.

But, as the accessibility of credit increases, the quality of people’s money habits decrease because, well… it’s free money to some people.

So, to make sure you’re taking advantage of the benefits of credit cards while avoiding the drawbacks, here are 8 credit card mistakes you need to be avoiding.

Making Minimum Payments

Making minimum payments is better than paying late, or not paying at all.

But, try to pay off more than the minimum each month so you’re not building up large amounts of interest on your account.

Let’s use some numbers as an example of this crippling interest:

Say you have a credit card with a $1,000 balance and a 20% interest rate.

Your minimum payment will likely be around $27–30 per month.

If you only pay $27 a month, it will take you just under 10 years to pay off your balance.

The worst part?

You’ll pay $1,056.74 in interest alone.

Paying more in interest than for your original purchases emphasises how big of a mistake paying the minimum can be.

Don’t fall victim to compound interest.

Cancelling A Credit Card

Building your credit score is as much about time and longevity as it is about making your payments on time.

By closing credit card accounts, you’re reducing the time you’ve been building credit for, which can hurt your credit score.

Think of it like building up no claims time on your car insurance.

The greater/longer your no claims is, the cheaper your insurance will be.

Also, closing accounts can hurt your credit utilisation ratio, by reducing your overall credit limit, which can also hurt your score.

So, keep accounts open if it makes sense for you to do so financially.

Of course, don’t leave accounts open with huge balances as you’ll drown in interest payments. But, think of time as a valuable asset when building credit, and consider leaving accounts open to help improve your credit score.

Applying For Too Many Credit Cards

Applying for too many credit cards at once can cause red flags to appear.

Lenders might see you as desperate, and in a lot of financial turmoil, which presumably isn’t the case. But, that’s how they’ll see it.

To avoid this, imagine you have a limited amount of credit applications.

The general rule of thumb is to wait for at least 3 months between credit applications, so you don’t raise any alarm bells.

This way, you won’t damage your credit score, and you won’t be seen as desperate for credit.

Paying Late

Remember when I spoke about how costly it could be to only make the minimum payments?

Well, paying late is worse.

Please, whatever you do, don’t be late with your payments.

It’s simple. You use a credit card… to improve your credit score.

You miss payments… your credit score goes down, and these late payments will stay on your record for 7 years.

The longer your account stays in the red, the more your credit score will drop.

Reports from Experian have suggested that the number of people who miss payments is increasing significantly.

Please make sure this isn’t you. You can ensure this by:

• Regularly keeping tabs on your credit limit and balance.

• Making automatic payments so you don’t forget.

• Build a small emergency fund in case one month you find yourself short.

Not Watching Transactions

Like I mentioned above, it’s a good idea to get into a habit of keeping a close eye on your credit card transactions, for two main reasons:

• So you don’t miss payments.

• In case of fraudulent activity.

Lenders lose billions each year to credit card fraud, and millions of credit card holders have fallen victim to fraudulent transactions.

Not keeping an eye on your transactions can be a costly mistake. So, for a small amount of effort, it’s best to make a habit out of this.

Overspending

It can be easy to lose track of your spending, especially when you don’t feel the financial hit right away.

But, this is a common mistake and you could find yourself in trouble if you overspend.

Like most things, it’s always a good idea to have a good idea of what your spending is like in relation to your credit limit.

You might want to create a budget for your credit cards if you feel this is necessary, or just to have in the back of your mind an idea of what things you’re able to buy, and the things you can’t.

In most cases, the solution here, is discipline.

Not Getting Credit Limit Increases

Like I spoke about earlier, a higher credit limit will decrease your credit utilisation ratio, which is a good thing as it tells lenders that you don’t really need the credit.

This can boost your credit score, all from a limit increase, so why not request it?

But, just like lifestyle inflation, make sure the limit increase doesn’t result in a balance increase, as it will make the limit increase a bit pointless.

Having A High Balance

On the topic of credit utilisation ratio, having a high balance is another mistake you want to avoid.

Having a high credit utilisation ratio is a big red flag to lenders and can damage your credit score. It shows that you’re not using your credit as responsibly as you should be.

A rule of thumb is to stay below a utilisation ratio of 30%. Much higher than this, and you risk damaging your credit score.

Thanks for reading! Be sure to subscribe (it’s free!) for more financial wisdom every week.