If you enjoy the benefits and convenience of using credit cards, don’t forget that they come with financial hazards that you should be aware of. To save money and maintain a good credit score, be sure to avoid the following 8 credit card mistakes:
Mistake #1: Having your credit limit cut
Your credit limit can be slashed even if you pay your credit card bill on time every month—so this may not be a problem you can avoid. Having less credit generally lowers your credit score because it’s based in part on how much debt you have relative to your available credit. A lower credit score affects everything in your financial life because it makes getting credit in the future more challenging and expensive. It can also make it more difficult to rent an apartment, find a job, qualify for government benefits, and get affordable insurance rates.
Mistake #2: Letting an account go inactive
Using all your credit cards periodically is a good strategy to avoid having them canceled for inactivity and may also reduce the likelihood that your credit limit gets cut. For cards that you want to keep, make a small charge at least once every few months and pay it off in full.
Mistake #3: Exceeding your credit limit
If you agree to pay over-limit fees, your card company will process transactions that exceed your credit limit. But those fees are expensive, so be sure to monitor your balance so you never fly too close to the sun. As I mentioned in the first tip, racking up too much debt relative to your available credit will hurt your credit score. A good rule of thumb is to never charge more than 30% of your available credit. For example, if you have a $3,000 credit line, never let your account balance exceed $900 (30% of $3,000).
Mistake #4: Canceling a card
You shouldn’t have more credit cards than you really need; however, closing an account can lower your credit score. Again, this goes back to the debt-to-credit ratio issue that I previously mentioned. When you cancel an account, you immediately have less available credit relative to your existing debt. Canceling a card is especially harmful to your credit score if you’ve owned the card for many years, have used it responsibly, and have a high credit limit.
Mistake #5: Making late payments
The law generally prevents card issuers from increasing interest rates on your existing balances—except when you’re more than 60 days late making a payment. If your interest rate is hiked and you don’t want to pay a higher rate, you can cancel the account and pay off your balance under the old account terms. If you have good credit you could surf the balance over to one of the credit cards with no interest on balance transfers. When you have a good track record for paying bills on time, you’ll maintain a higher credit score and reduce the likelihood that a card company will cut your credit limit.
Mistake #6: Making minimum payments only
You should always pay your credit card bill in full each month—or at least pay as much as you can. Carrying a balance from month to month doesn’t increase your credit score, it just costs you money. Even when you make a minimum payment, interest accrues each month. Your purchases could end up costing you double or triple the original price, depending on your interest rate and how long it takes you to pay off the card.
Mistake #7: Paying annual fees
There’s no reason to pay an annual fee to have a credit card, except perhaps for a rewards card. However, if you don’t use the rewards or if their real value is less than the annual fee, the benefits may not be as good as you think.
Mistake #8: Co-signing an account
If you co-sign for a credit card with someone, you are responsible for their purchases if they don’t pay or even if they die. Your credit can be positively or negatively affected by the actions of a co-signer. Instead of co-signing, having an authorized credit card user might be a better option, depending on your situation. You’re responsible for the charges made by an authorized user, but you’re in control and can set their credit limit and drop them from the account at any time.