If you know how to use a credit card responsibly, you can boost your financial life. Credit cards help you shop more securely online and book rental cars, and they can create more flexible cash flow opportunities. When used responsibly, credit cards also help you build credit.
Flip the coin, however, and you get irresponsible credit card use. That can hurt your cash flow, leave you in debt and lower your credit score.
Many people think responsible credit card use simply means paying their bills on time. But that’s just the minimum. In reality, there are a few bad habits people can fall into that hurt their credit and make for poor credit card use. Learn about some bad credit card habits you can’t afford not to change below.
In This Piece
- Constantly Making Late Payments
- Only Making the Minimum Payment
- Ignoring Your Statements
- Applying for the Wrong Card
- Maxing Out Your Credit Cards
- Applying for Too Many Credit Cards at Once
- Not Using Your Credit Cards
1. Constantly Making Late Payments
Timely payments are the biggest factor in credit score calculations, so you should strive to pay all your debts on time. Missing credit card payments regularly is a good way to tank your score and make your future debt more expensive. Those late payments can also stay on your credit report for up to seven years.
On top of this, many credit card companies charge late fees. They can be $40 or more, so they add up to a lot quickly. You might also face penalty interest rates that make your debt more expensive if you’re late with your payments.
2. Only Making the Minimum Payment
You can keep late payments off your credit history by making the minimum payment amount each statement cycle. But that makes your debt more expensive overall and means you’re paying down your balance for much longer.
For example, say you have a card with a $1,000 balance and 24% interest. Your minimum payment is $25. Paying only $25 a month, it would take you 82 months to pay off the balance and cost you a total of $2,031 with interest. If you paid $100 a month instead, you’d pay off the balance in 12 months for a total of $1,127 with interest.
As you can see, paying more than the minimum makes a huge difference. Whenever possible, add what you can to any payments.
3. Ignoring Your Statements
If you’re struggling to pay your bills or just busy, you may be tempted to toss statements to the side or even hide them in a drawer. However, you should always open and review your statements as soon as possible after you get them.
Reviewing your statements gives you a chance to ensure there aren’t mistakes or charges you didn’t make. Reporting fraudulent charges sooner rather than later can help you reduce any negative outcomes associated with identity theft.
You should also create a monthly budget that helps you make your credit card payments without too much stress. That way, you aren’t tempted to ignore those statements.
4. Applying for the Wrong Card
You should always research a credit card before you apply for it—first, because you should understand the credit requirements and whether you’re likely to be approved. Applying for a card that you can’t get simply results in an unnecessary hard inquiry on your account.
Second, you should research cards to find ones with rewards, benefits and perks that work for you. For example, some luxury rewards cards have annual fees of $400 to $700. Those cards are only a good idea for individuals who can max out rewards to make up for the fees. If that’s not you, you may want to apply for more cost-effective cards.
5. Maxing Out Your Credit Cards
Credit utilization is another big factor in your credit score. This refers to how much of your available credit you’re using.
For example, if you have a credit limit of $1,000 and a balance of $600, your credit utilization is 60%. That’s really high and can have a negative impact on your score. Keep your credit utilization rate at 30% or lower for the best result.
6. Applying for Too Many Credit Cards at Once
Each time you apply for a credit card, your credit is pulled by the lender. That leads to a hard inquiry, which can reduce your credit score. Other lenders may also see numerous hard inquiries on your credit as an indication that you’re struggling with finances or desperate, which is never good when you want to apply for credit.
Opening a bunch of new credit cards at the same time can also impact the average age of your credit accounts. Credit age is a factor in your credit score.
7. Not Using Your Credit Cards
If you don’t use your credit cards, your card issuer may decide to close your account. This can impact the age of your open credit accounts, which adversely affects your credit. Instead, ensure you have credit cards that work for you so you can integrate them into your day-to-day financial life. Use them for items you would normally purchase and pay off each statement to avoid interest.
How to Use a Credit Card Responsibly
Now that you know what not to do with your credit card, here are a few tips for how to responsibly use a credit card:
- Only use your card for necessary items you’d already be purchasing. Avoid using cards for frivolous purchases, as that can lead to running up your balances.
- Always make payments on time. Consider setting up automated payment reminders or automated payments so you never forget.
- Keep your balances under 30% of your credit limits so you don’t take a hit on credit utilization. This doesn’t mean you can’t use your entire credit limit. However, you should pay it down to under 30% before the statement cycle ends.
Manage Your Credit and Credit Cards
Keep on top of your credit by signing up for the free Credit Report Card. Once you know where you stand, look for credit cards that best serve your needs.
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