Using credit cards wisely can be a great thing. Smart credit card use can help you to improve your credit score, which makes future borrowing easier and cheaper. Many cards also offer generous rewards, so you can actually earn free trips or even cash back just for your routine everyday spending.
The key, however, is that cards are a good thing if they are used wisely. Unfortunately, they can also be detrimental to your personal finances if you make mistakes when using them. In particular, there are three big errors to watch out for.
1. Maxing out your credit cards
Maxing out your cards means charging up to the limit that the cardholder set for you. For example, if you have a $5,000 line of credit and you charge $4,999 on your card, you’ve maxed out your cards.
There are a few reasons why maxing out your credit cards could be a big mistake. You could find yourself with a balance that is really difficult to repay, for one thing. But a maxed out card can also do serious damage to your credit score.
In fact, using more than 30% of the credit available to you can actually reduce your score. That’s because credit utilization ratio is one of the most important factors that credit reporting agencies and lenders look at.
Maxing out your card also puts you at risk of over-the-limit fees if you happen to exceed the amount you’re permitted to spend. And you won’t have available credit in case you need it.
To avoid this mistake: Cap the amount you spend on your cards and stay well below that all-important 30% threshold.
2. Paying only the minimum due
Credit card companies set really low minimum payments. They benefit when you pay only the minimum required because your payment will generally just barely cover the interest costs. You’ll end up paying on your balance for years and years, making little progress in paying down your credit card debt — despite diligently sending in a check every single month. Over time, you can end up paying tens of thousands of dollars in unnecessary interest charges.
To avoid this mistake: Pay more than the minimum every month. Ideally, the best thing to do is to pay off your entire balance in full when you get your statement so you never end up owing any interest at all. If that’s not possible, send in as much as you can with each payment so you can bring your balance down quickly and avoid getting stuck in a debt trap where your hard-earned cash is sucked away due to interest charges.
3. Missing payments
When you miss making credit card payments you get hit with fees in most cases. But you will also damage your credit score. Once a payment is at least 30 days late, credit card companies will report it to the major credit bureaus. Even one missed payment could reduce your score dramatically and a history of missed payments could make it very difficult and expensive to get any type of loan.
To avoid this mistake: Set up autopay if you can. Or, if you are worried you’ll overdraft your bank account, set a calendar reminder instead to make sure you pay your bill before the deadline.
If you can avoid missed payments, falling into the minimum payment trap, or maxing out your cards, you are well on your way to using credit cards successfully to help improve your financial situation.
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