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About 55% of Americans with credit cards are in debt, which means millions of Americans are falling prey to one or more of these common―yet deadly―credit card mistakes.
In fact, US households added $26 billion in credit card debt, with about one in 10 people noting a balance over $5,000!
Given the risks associated with credit cards, you’d do well to learn about their most dangerous pitfalls. This way, you can wield them safely, while benefiting from their benefits and perks.
9 Deadly Credit Card Mistakes
Here are nine credit card mistakes to avoid. Use this guide to equip yourself with the knowledge you need to make savvy financial decisions.
1. Paying Late
One of the most common credit card mistakes people make is paying late. Falling behind payments by over 30 days could have a negative impact on your credit score. Paying over 60 days late, on the other hand, could increase your interest rate.
Instead, you’ll have to pay the highest penalty rate.
When you start using a new card, make sure you understand the credit card’s terms. Many people ignore the lengthy fine print in their agreement. Reading through the jargon can help you understand applicable fees and account terms.
For example, look for the annual fee, or the fee you’re charged for holding the card. You’ll also need to look for the penalty annual percentage rate (APR). The penalty APR indicates how much the interest rate will increase if you pay your balance late.
Your card will likely have a late payment fee, too.
Reading the terms of your card will help you understand applicable fees and the consequences of late payments.
2. Ignoring Statements
One of the costliest credit card mistakes you can make is ignoring your monthly billing statement. Ignoring your statement could cause you to miss fraudulent purchases or reporting errors. Instead of making this mistake, review your statements regularly to make sure the information is accurate.
You can also check your transactions throughout the week to compare them with your receipts.
Take the initiative when reviewing your charges. If anything seems out of place, make sure to resolve these charges as soon as possible. Spotting fraud immediately can help you avoid thousands of dollars in inaccurate charges.
3. Making Minimum Payments
The average balance on a credit card is now almost $6,200. Unfortunately, many people make credit card mistakes like paying the minimum or carrying a balance.
Failing to pay your bill in full can cause payments to add up. As a result, you might fall into debt without realizing it. You could end up racking up interest charges, too.
After a while, paying the minimum can stack up until you need months or years to pay off the debt.
Instead of paying the minimum, have a plan in place. How will you pay off larger expenses? Can you dedicate a consistent amount of money each month for paying off your credit card?
It’s also a myth that carrying a balance month-to-month can improve your credit score. In fact, it’s the opposite: carrying a balance can hurt your credit score.
When you carry a balance, your credit utilization rate will increase. It can also cause interest charges to increase.
Instead, try to pay more than the minimum each month to cover your expenses.
4. Getting Charge-Off Listed
One of the biggest credit card mistakes you can make: letting your credit card get charged-off.
This occurs when your account is listed as delinquent. As a result, the lender will sell your debt to a collector to write off the remaining balance.
If your credit card gets charged off, the listing will remain on your credit report for seven years. You might struggle to get other credit cards or loans as a result.
It takes around six months of missed payments for you to get charge-off listed. To avoid this mistake, make sure to bring your delinquent accounts current. Otherwise, avoid falling into debt altogether.
5. Sharing Your Card
As much as you trust friends and family members, it’s important to avoid loaning your credit card to someone else. After all, you can’t control the purchases they’ll make with your card. At the end of the day, you’re the one responsible for paying off those charges.
Avoiding lending your card to friends or family members. If you do lend your card out, prepare yourself to pay off any purchases they make.
6. Using Too Much of Your Available Credit
If you care about your credit score (which you should), then it’s best to maintain a credit utilization ratio that is less than 30 percent. In layman terms, that means you’re using less than 30% of the credit available to you.
For example, if your credit card issue has given you a credit limit of $5000, then you won’t want to have a balance of more than $1,500 (30%).
You can accomplish this a few different ways, including:
- You can ask your credit card company to increase your total available credit
- You can pay your credit card off each time your credit utilization ratio nears 30% (even if it is prior to the end of your monthly cycle)
- You can limit your card to periodic or small expenses
The signal this behavior sends to the credit reporting companies is that you use the credit available to you responsibly, instead of maxing it out.
7. Maxing Out
Maxing out your credit card is as dangerous as failing to make your payments. In addition to hurting your credit score, maxing out your card can also make it difficult for you to pay off expenses.
Edging too close to your credit limit can also lead to over-the-limit fees.
You might need to pay off a penalty interest rate, too. Don’t forget to read the terms of your credit card to determine the consequences of maxing out your card.
Maxing out your card also causes a high credit utilization ratio (in some cases, 100% utilization). As mentioned above, this will adversely affect your credit score. Simply put, just don’t do it.
8. Applying for New Cards
When you apply for a new credit card, it often impacts your credit score. Applying for too many new cards in a short span of time can have costly consequences.
For example, if you’re trying to buy a home, your lender may become suspicious. The reason is this activity can signal that you are intending to take on new debt or will be incurring monthly expenses in the form of credit card payments.
Instead, space out how often you apply for a credit card. Only apply when you need a new card.
9. Closing Accounts
As you avoid these common credit card mistakes, make sure to avoid rash decisions. For example, you shouldn’t close your credit card in a rush. Instead, leave your credit card open until you’ve paid it off.
Otherwise, it could drop your credit score, which means that borrowing money could either be more difficult (you may not qualify) or more expensive (due to higher interest rates).
As a general rule of thumb, it’s best to keep your unused credit cards open, because you will:
- Benefit from a longer average credit history
- Have a larger amount of available credit, which will keep your credit utilization ratio lower
Plastic Pitfalls: 9 Credit Card Mistakes That Could Get Costly
Dodge these plastic pitfalls! Instead of making these nine credit card mistakes, make smarter decisions about your finances. With these savvy tips, you can avoid debt and protect your credit score.
Looking for more financial advice your parents and teachers should have taught you? Explore the Finance section of this blog.
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