With billions of credit cards being used every day, it's no surprise that there are a lot of misconceptions and misunderstandings when it comes to credit. Below are the eight most common credit card mistakes that you should avoid.
1. Maxing out credit cards: Although there are circumstances when you may need to put a hefty amount on your credit card, it's ideal to never max out your credit cards. On top of possibly going over the credit limit with interest or accidental charges, maxed out credit cards can also have a negative impact on your credit utilization ratio, a percentage used by lenders to determine how risky it is to loan you money. It's calculated by dividing your total used credit by your total available credit to determine a percentage. It's better to have a lower percentage -- between 10 and 30 percent -- because it shows you have more available credit and less money owed.
2. Only paying the minimum payment: This may seem like the easiest way to pay down a balance, however only paying the minimum payment isn't the most beneficial way to pay. Along with hurting your credit utilization ratio by carrying more debt, you'll end up paying more money in interest in the long run. Even just paying an additional $20 each month will help you pay down the balance quicker and save you money overtime.
3. Closing old credit cards: A lot of times consumers get overwhelmed with the number of credit cards they acquire, so they'll cancel any old cards they have. Even though this sounds like the best plan to manage your cards, closing old credit cards can actually hurt you by lowering your credit score. Fifteen percent of your FICO credit score is based on your credit history, according to FICO, so by canceling any credit cards that were opened 5, 10 or 15 years ago, you're potentially "deleting" that history from your reports and potentially impacting your credit scores. It also lowers your overall credit limit, which can increase your credit utilization ratio. Instead of closing the cards, you should store them in secure place, such as a personal safe, and only use them when you need to.
4. Applying for multiple credit cards: Opening new lines of credit is one of the many ways to boost your credit scores, mostly because it lowers your credit utilization ratio. Even so, applying for multiple credit cards at once may have the opposite effect on your credit scores by making you seem desperate for credit. Every time you apply for a new line of credit, such as a credit card or loan, the lender pulls a copy of your credit reports and scores, which is called a hard inquiry. These inquiries appear on your credit reports and can even lower your credit scores if you have too many of them at one time. So if you're planning on applying for any type of credit card, it's essential that you only apply to one card at a time and choose a card that you're almost certain that you'll get approved for.
5. Not knowing when the introductory period ends: Credit cards with introductory periods, such as a 0 percent APR offer, are great options to help you maintain any previous balances, through a balance transfer, and can even help out if you need some financial assistance with a large purchase in the near future. That being said, it's essential that you know and keep track of when the card's introductory period ends, or you may be paying more in interest or fees that you weren't anticipating.
6. Taking cash advances: There are instances when you may be in need of some cold, hard cash, and taking a cash advance from your credit card may seem like the best option. It's not. Cash advances charge additional fees including a transaction fee that you're charged every time you get a cash advance. You are also charged a higher APR than on other purchases. Cash advances also don't have a grace period for interest such as traditional purchases do, so you begin to get charged interest the day that you withdraw the money. It's best if you find another solution to get the cash, pay with credit if you can or make sure you pay off the cash advance as soon as possible so you don't have to pay a lot of money in additional fees and interest.
7. Not reading the fine print: Every credit card has some sort of fine print to explain the logistics of the card. Often times this fine print is overlooked by the card holder, which isn't the best idea because that fine print explains all of the details for a card, including what your APR is, what fees come with certain transactions and any rules that dictate how the credit lender can change the terms of your agreement. The fine print is considered the legal agreement between the cardholder and lender, and reading it thoroughly can help the cardholder understand every aspect of their card so there are no surprises down the road.
8. Ignoring monthly credit card statements: This is a habit that a lot of card holders have gotten used to. They receive the statement and just throw it out instead of reading it. It's essential for you to comb through your monthly statement to verify that there are no possible fraudulent charges on the account. If you notice any unfamiliar charges, you should contact your bank immediately and report it as fraud. By simply looking through your statement each month you're being proactive about protecting yourself from identity theft, and more likely to catch potential fraud before it gets out of hand.
