There are millions and millions of credit cards in circulation in this country. Most people have more than one, which means that most people in the country are familiar with how credit cards work. Sadly, myths and misinformation have made our knowledge of credit cards a little muddy. Most of us are making some serious mistakes when it comes to using our credit cards. If you find yourself making any of these common credit card mistakes, it might be a good idea to adjust how you are using your cards:
1. Only paying the minimum payment
This seems like the easiest way to make a payment on a credit card, however there are some major drawbacks to only paying the minimum payment. The biggest drawback is that you’re paying more money overtime in interest. Paying an additional $15 to $20 each month may not seem like it’ll make a huge difference, but that additional money begins to add up and soon you are paying hundreds of dollars in interest.
An additional drawback to only paying the minimum balance is that it may impact your creditworthiness. If you aren’t paying your balance off completely each month, lenders might think that you’ve taken on more debt than you can handle. It’s important to maintain your creditworthiness if you intend to apply for a loan or credit card. On top of paying more than the monthly payment, you should also make sure that you’re making the payment on time because it accounts for 35 percent of your credit score, according to FICO, and can have a negative impact on your credit scores, which is also an important factor to opening a new loan or credit card.
2. Closing old credit cards
This is a bad habit that most credit card holders are guilty of. Most think that once they pay off a credit card, it’s in their best interest to close the card so they don’t have the temptation to build up a balance again. Even though it seems like a good idea to remove the temptation, closing the card can impact your credit utilization ratio, which can negatively impact your credit scores.
The credit utilization ratio compares the total used credit to the total available credit to provide a percentage that helps determine how risky it is to loan you money. A higher ratio has more of a negative impact on a credit score. The credit utilization ratio is calculated by adding up the total used credit and dividing it by the total available credit. For example, if you have a total of $700 in credit card debt and a total of $2,100 in available credit, then you have a credit utilization ratio of about 33 percent.
Most experts recommend that it’s best to keep your credit utilization ratio between 10 and 30 percent. It should be noted that the credit utilization is only calculated with revolving debt (credit cards), as opposed to installment debt that has a fixed number of payments, such as auto loans or mortgages.
3. Maxing out credit cards
Even though there are circumstances when you may need to use most or all of your available credit, it’s best if you pay down the balance as quickly as you can. If you don’t, it can have a negative impact on your credit scores. Similar to closing old credit cards, maxing out your credit cards or carrying a hefty balance raises your credit utilization ratio.
In addition to impacting your credit scores, maxing out your credit cards also puts you at risk of accidentally going over the credit limit either with interest or accidental charges. It also makes it harder for you to pay the balance off, especially if you’re only making the minimum payment.
4. Applying for multiple credit cards at once
Opening new credit cards is one way to positively impact your credit scores because it adds to your total available credit, which lowers your credit utilization score. That being said, applying for multiple credit cards at once may have the reverse affect on your credit scores. Too many hard inquiries on your credit report can negatively impact your scores, which will make you seem desperate for more credit.
What’s a hard inquiry? Each time you apply to a credit card (or any other type of loan) and a lender pulls your credit report, it shows up on your report as a hard credit inquiry. Having too many inquiries at one time has a negative impact on your scores since it can look like you are desperate to get more credit, which deters creditors from giving you more. It’s best to apply to a credit card that you know you’ll get approved for. If you don’t know which credit cards you are eligible for with your current credit score, here are a couple for options for those with good and average credit:
Best card for good credit: Chase Freedom Credit Card
If you have good credit, then the Chase Freedom Credit Card is the best option you. With this card you’ll earn 1% unlimited cash back on all purchases and 5% cash back — up to $1,500 — within certain bonus categories that rotate on a quarterly basis. On top of that, Chase Freedom also offers a 0% introductory APR on purchases and balance transfers for 15 months and doesn’t charge any annual fee.
Best card for average credit: Barclaycard Rewards Mastercard – Average Credit Card
On top of being the best card for average credit, the Barclaycard Rewards Mastercard offers top-notch rewards. You will earn 2 points per $1 on gas, grocery and utilities as well as 1 point per $1 on every other purchase. On top of the generous rewards, this card has no annual fee, no blackout dates, no redemption fees and no limits on the points you can earn.
Want more credit card options? Learn all of the best credit cards for excellent, good, average and bad credit scores here.
5. Ignoring monthly credit card statements
This is a habit that far too many credit card holders have grown accustomed to. You receive the statement in the mail and drop it into the shredder before you even open it. Even though shredding it is the safest route, it’s still essential that you open the statement and thoroughly look through it before you throw it out. Verify that you completed each of the transactions yourself and report any unknown transactions to your bank as possible fraud. This is an important habit to get used to, especially with all of the store data breaches that have occurred since the end of 2013, including the Target breach that exposed 110 million of its customers. By simply checking your statements each month, you can know if you fell victim to a possible security breach and even catch fraudulent transactions before it’s too late.
Disclaimer: This content is not provided or commissioned by the credit card issuer. Opinions expressed here are author’s alone, not those of the credit card issuer, and have not been reviewed, approved or otherwise endorsed by the credit card issuer. This content was accurate at the time of this post, but card terms and conditions may change at any time. This site may be compensated through the credit card issuer Affiliate Program.