Make no mistake about it: a credit card can be an extremely useful tool. From making purchases to working to build or rebuild your credit, a credit card can help you reach your financial goals. But be sure to avoid these common credit card mistakes so you can get the most out of your card.
How Does a Credit Card Work?
When you first start looking into the world of credit cards, it can feel daunting. There’s a lot of information, and it can feel impossible to learn it all. So, what is a credit card? It’s a financial tool that allows you to make different types of purchases, like shopping online or buying something without cash. Your credit card issuer will front the costs, but you’ll need to pay that money back over time.
At the end of the billing cycle, typically one month, you’ll receive a statement that will list all of your credit card transactions and let you know how much you owe. You can choose to make a minimum payment or pay it off in full. If you choose to let some of the balance carry over to the next cycle, your issuer will charge you interest. That interest is based on your Annual Percentage Rate (APR). You may also have other fees each month, like an annual fee, that’s added to the rest of your balance.
What Building Credit Means
Building your credit is about more than a score. It touches nearly every part of your life. Your credit score is used as a determining factor by many different companies. Here are some of the key ways your score can impact your life:
- Utilities: Like a credit card issuer, utility companies are expecting you to make payments to them over time. They often use your credit score as an indicator of whether or not you’re likely to pay on time. If you have a low credit score, you may have extra fees, deposits, or have to have a co-signer.
- Insurance: Insurance is a recurring payment that has a variety of rates and terms you’re eligible for. Where your credit score lands can impact what kind of coverage you can get and how much it will cost.
- Employment: Many people view credit scores as a way to gauge how reliable someone is. You may be the perfect candidate for a job, but your credit report may deter them from hiring you. You may be an amazing employee, but a low credit score can give people the wrong impression.
- Housing: Similar to employment, a lower credit score can result in less trust with your landlord. There may be higher fees or certain requirements, like a co-signer, that are dependent on your credit score.
- Bank Accounts: Banks and credit unions run a credit check before approving new accounts. How you manage your money now can affect what options you have in the future.
- Relationships: As you can see, credit affects many areas of your life. A big one it can affect is your relationships. Poor credit can put a strain on some relationships. Your ability to handle finances doesn’t just affect you, but those around you.
Make On-Time Payments
According to FICO®, payment history is the single most important part of your credit score. Not only do late or missing payments result in late fees and penalties, but they can also significantly affect your FICO® score. So when should you pay off your credit card? The answer is before the due date. Preferably about a week in advance and be sure to make the minimum payment, or more if you can. Because making anything less than the minimum payment also counts as a missed payment.
Missing credit card payments can leave lasting effects on your financial life. That includes everything from getting new cards, taking out loans and even renting an apartment. All of that means missing payments can be one of the worst mistakes you make with your credit card.
Know Your Credit Card Due Date
You need to know when your payment is due so you can always make the minimum payment on time. Set a reminder on your calendar each month, about a week before your due date, to sit down, go over your bills, and pay them. If you have a card that’s due at a different time than your other cards, you can call the company and see if they would be willing to adjust your payment due date. Keeping everything in one place helps you keep track of items, and having one date to focus on bills can help you keep your financials on track and organized.
What is Credit Utilization?
Your credit utilization ratio, usually expressed as a percentage, represents the total amount of credit you’re actively using and is another factor affecting your credit score. The utilization ratio is the amount of credit you’re using divided by your total available credit. This ratio is used to help determine how well you’re currently managing your debt.
Most financial experts recommend keeping your total credit utilization rate below 30%. Lenders generally view lower credit utilization more favorably because it can be an indicator that you’re managing your credit well and not overspending. A higher rate may suggest that you’re overextending yourself financially.
Look Into Secured Credit Cards
A secured card is one of the easiest credit cards to be approved for, especially if you’re new to credit. It has all of the same basic functions and benefits of a credit card, but requires a security deposit to open the account. That deposit is held by the credit card issuer for as long as the account is open and typically equals your credit limit. Over time, your credit limit can expanded past your deposit if you continue to demonstrate good financial habits. If you’re looking to get a secured card, do your research to see which one would be the best option for you.
Credit Card Mistakes to Avoid
- Ignoring Card Benefits: Failing to learn about the benefits your card might offer – like discounts with retailers, a free credit score, account alerts, and a mobile app – can lead to you losing out on savings.
- Opening Too Many Cards Too Quickly: Too many credit cards can make you look stretched thin financially. Applying for too many credit cards in a short amount of time can lower your credit score for the same reason.
- Maintaining High Balances: Maxing out your credit card or carrying a long-term high balance can raise your credit utilization ratio and hurt your credit score. Remember, keep that ratio low to get the best score!
- Making Less Than The Minimum Payment: If you make less than your minimum monthly payment, it can still be considered as a missing payment by your card issuer. You should always make at least the minimum payment – or more if you can.
- Missing Your Billing Statement: Reviewing your monthly billing statement is a great way to track your expenses, create a budget and keep an eye out for any charges that you didn’t make so you can report them to your issuer.