The 3 biggest mistakes even smart people make with credit cards
- A well-managed credit card can be an important step toward earning good credit scores.
- When you make credit card mistakes, however, those same accounts can set you back and potentially hurt your credit scores.
- You should avoid carrying high balances and paying late if you want your credit cards to help you instead of causing credit problems, and avoiding credit cards all together is not a solution.
- Read more personal finance coverage.
A credit card is a tool that can make your life a lot easier. Making purchases can be more convenient, safer, and more rewarding all courtesy of the little pieces of plastic you carry around in your wallet.
But there's another side to the story. Many people make mistakes when it comes to their credit cards - sometimes big ones.Credit card mistakes can be costly. Not only can a poorly managed credit card result in a lot of wasted money, but it could snowball into a bigger problem by damaging your credit scores.
Below you'll find three of the biggest mistakes people make when it comes to credit cards.
Mistake No. 1: Carrying a balance
Carrying a balance could cost you money
You probably won't be surprised to read that rolling an outstanding balance from one month to the next can cost you extra money in interest fees. Credit card interest is notoriously high compared with other forms of debt. If you repeat this habit month after month those interest fees could add up to a significant amount over time.
Let's say you have a credit card with a $5,000 balance and an APR of 17% (slightly lower than the current average credit card interest rate of 17.54%, according to CreditCards.com). If you were to make only the minimum payment on that card (around $120 per month), here's what the decision would cost you, according to Bankrate's credit card interest calculator.
- It would take you a little over 22 and a half years to pay off your debt.
- You'd pay an extra $6,524 in interest, assuming you stopped using the card for additional purchases.
Paying solely the minimum payment is an extreme example. Hopefully that's not a mistake you're currently making. However, the truth is that carrying any type of balance from month to month is a misstep when it comes to credit cards.
Carrying a balance could lead to credit score damage
Not only can rolling a balance on your credit cards be expensive in the short term, it can lead to potentially bigger problems as well. When you carry an outstanding balance on your credit cards it may increase your credit utilization ratio (also known as your balance-to-limit ratio). An increase in this number isn't good for your credit score.Credit scoring models, like FICO and VantageScore, pay attention to how much of your credit limit is being used on credit card accounts. When your credit report shows that you're using a bigger percentage of your overall credit limit on a revolving credit card account, you represent a higher credit risk to lenders. Your credit scores may go down as a result.
The good news is that you can often regain any "lost" credit score points by paying down your credit card balances again. Once the new, lower balance (and subsequently lower credit utilization ratio) is updated on your credit report, your score will likely start to rebound.
Mistake No. 2: Paying late
If you miss the due date on your credit card statement, many card issuers will tack on a late fee to your bill. For your first late payment, that fee can be up to $25. Any additional late fees can be as high as $35 each.
But a late fee might be only the beginning of your problems. When you fall behind on your payments there's also a chance your card issuer could opt to increase your interest rate, both on future charges and your existing balance.
Paying late could hurt your credit score
Perhaps even worse than the immediate expense of late payments is the potential for credit score damage. Your payment history influences 35% of your FICO Score. When you pay your credit card bill more than 30 days past the due date, you may be at risk for serious credit score damage.
If late payments show up on your credit reports and harm your scores, you might have issues qualifying for future financing, depending upon the severity of the credit damage. Also, even if you qualify for new loans or credit cards, a lower credit score could mean that you'll pay more when you need to borrow.
If you're already struggling with credit damage from late payments, you can take some comfort in the fact that negative marks can't stay on your credit reports forever. The Fair Credit Reporting Act requires late payments to be removed from your credit reports after seven years.
Also, recent late payments are a bigger deal where your credit scores are concerned. That's good news because it means if you keep future payments on time, those old late payments will impact your credit scores less and less as time passes.
Mistake No. 3: Avoiding credit cards all togetherThe final mistake you want to watch out for is avoiding credit cards all together. If you've had a bad experience with credit cards in the past, it's easy to understand why you might be hesitant to try again. But swearing off credit cards is a mistake that could hold you back. When you avoid credit cards, you miss out on the opportunity to use those accounts to build a better credit rating.
When you open and use a credit card the right way, it has the potential to help you build better credit scores for the future. Good credit can be a valuable asset anytime you need to borrow money. Good credit can even save you money when you apply for insurance coverage or new utility accounts.
Is it possible to establish credit without opening a credit card account? Yes, it's possible. You can open installment accounts, like a credit builder loan with Credit Strong or Self Lender, and pay them on time.
However, credit scoring models do consider the mix of account types that appear on your credit reports. (Credit mix is worth 10% of your FICO Score.) By adding revolving credit cards to your reports, there's often a potential to improve your credit more.
Credit cards can be intimidating for many people, but they don't have to be. In reality, it's no more difficult to manage a credit card properly than it is to manage the money in your bank account.
Remember, you're in control when it comes to your credit cards. If you use them wisely, they can make your life more convenient. Even better, a well-managed credit card may help you to establish better credit and potentially give you a chance tap into some attractive rewards for purchases you needed to make anyway.