It's no secret that having a good credit score is essential to a healthy financial future. So why do so many people still struggle to reach a FICO Score of 740 or higher? One theory is that many individuals are making the same habitual mistakes and don't even realize that they're actively jeopardizing their credit score. Because of this, we've compiled a list of the seven most common credit card mistakes that will haunt your credit report for years to come.
- The Free Money Mentality
The "free money" mentality is the worst possible financial attitude to have when it comes to handling credit cards. Viewing a credit card as a blank check will inevitably lead people to make purchases without ever considering when or how they plan to pay it off. Many inexperienced cardholders fail to realize how quickly their charges can add up and are shocked by how much they have spent when they receive their monthly bill. Since the bill they receive is obviously too large to pay off in full, they casually resort to making the minimum monthly payment, while continuing to swipe their credit card as if it were an endless source of cash. This is a dangerous cycle that will ultimately lead to mountains of debt and a tarnished credit score.
It's a common mistake to use credit cards for purchases you wouldn't normally be able to afford. Even the most responsible credit card users will occasionally succumb to the lure of buying things they don't have the money to pay for. Even if you have the best intentions of paying the balance off as quickly as you can, it is all too easy to let a "one time" credit card splurge become a habitual routine of debt accumulation. The trick to avoiding credit card debt is to use your card the exact same way you would use a debit card or cash by only making purchases that you have money in the bank to cover. If you find spending within your means especially difficult, start by only using your credit cards for small purchases that are 100% necessary, such as gas and groceries.
Establishing healthy spending habits is a critical first step to becoming a responsible credit card user; however, if you fail to make your payments on time, your credit score will continue to sink. In fact, your payment history is the largest factor affecting your credit score, accounting for 35% of your score composition! Not only does missing a payment bring your credit score down, but it may also incur hefty fees and can even raise your interest rate. If you're already in a financial bind, missing a payment will only make matters worse and can have a long term negative impact on your credit score.
A great way to avoid missing a payment is to set up automatic payments for your credit card. Through your online bank or by calling your credit card issuer, you can set up automatic monthly payments from your bank account to pay your credit card balance.
One important factor affecting your credit score that many cardholders are unaware of is something called credit utilization. Simply put, your credit utilization is the amount of credit you are actually using relative to the amount that is available to you. So if you have a credit card with a5,000 line of credit and you carry a2,000 balance, your credit utilization is 40%. In order to keep your credit score up, it's important to keep your credit utilization below 30%. The lower the better!
Many people see no problem with spending up to the limit on their credit cards as long as they don't go over the limit. But clearly, maxing out your credit card will result in having a very poor credit utilization, which will lead to a lower credit score.
Many people who find themselves in trouble with credit card debt seem to think the easiest way out is to simply apply for another enticing offer. If you have a well thought out plan and the discipline to see it through, then there are situations where a good balance transfer credit card can be a useful tool for debt consolidation. But if can't use your current credit cards responsibly, then the last thing you should do is apply for a new one.
Every time you apply for a new credit card, your credit score will be knocked down about 2-5 points, depending on your creditworthiness. That will make it more difficult to get approved for offers with better interest rates that can actually save you money. When lenders see that you have applied for multiple offers in a short amount of time, it appears that you are "desperate" for credit and you will be considered a high-risk borrower. All in all, the quickest way to get out of debt is to set a detailed budget and work on paying as much of your balance down as quick as you can.
Failing to read the fine print in the terms and conditions is a mistake that many inexperienced credit card holders will make. A credit card agreement serves as a binding contract between you and the credit card company, so it's important to be very clear on what you're agreeing to. In the fine print you'll find important details like when the introductory period ends, what your on-going APR will be, and how to avoid penalties and fees. If the terms are unclear, be sure to ask a representative to explain the details before signing the contract. Reading the terms and conditions will also help you get the most out of your credit card so you know what fees to avoid and how to maximize your rewards and savings.
The final mistake that consumers make regarding credit cards is simply not knowing their credit score. Oftentimes, consumers hurt their credit score by applying for multiple cards that they are not qualified for. For instance, someone may apply for multiple credit cards, bring their score down a number of points, and then be denied for a card that they would have been approved for if they had only applied for it in the first place. On the other hand, some consumers may have a higher credit score than they think, so they end up applying for a credit card with a high interest rate and fees, and no rewards.
There are a number of free credit monitoring services online, and many credit card companies have begun offering free FICO credit scores to their customers. It's important to always know your credit score and monitor your credit regularly so you can make the most informed financial decisions and begin taking the necessary steps to improve your score.
While this is not an all-inclusive list of potential credit card mistakes, these are the core issues that lead consumers down the slippery slope to credit card debt. Credit cards can be a very useful tool when used correctly, and they certainly don't need to be feared or avoided.
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