Are you among the two-thirds of Americans who have made this mistake with their credit card?
Credit cards have become one of the most common ways to pay for purchases. In fact, almost 4 in 10 Americans indicate in The Ascent's recent survey that they prefer this payment method over debit cards or cash.
There's nothing wrong with using your credit card to pay for things. After all, charging an expense on your card can earn you rewards and sometimes confer additional benefits such as extended warranties on purchases. Building a history of on-time credit card payments can also help you to build credit.
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That said, if you're not careful, you could end up making some credit card mistakes that could cost you. In particular, The Ascent's survey found as many as 66% of cardholders have made this one big error.
A common credit card mistake
So what's the mistake a majority of Americans are making? Carrying a balance. Almost 7 in 10 Americans admitted to letting a monthly balance carry over.
Unfortunately, when you carry over a balance instead of paying off your bill in full, you incur interest charges. Since credit cards tend to have relatively high APRs, the interest you end up paying even over the course of a single month can be substantial.
Once you've fallen behind on paying off your credit card in full, it will be more expensive the next month to pay off the remaining balance due thanks to interest being tacked on -- even if you don't charge anything additional on your card. This means you may end up carrying over your balance again and again until you're perpetually in credit card debt. The longer you carry a balance, the more interest you'll have to pay, and the more expensive every purchase you've made becomes.
If your credit card balance grows too high, not only will you pay a fortune in interest, but you could also end up hurting your credit score. Carrying a balance over from month to month doesn't do anything to help your score, but a balance that's too high will hurt your credit utilization ratio. This ratio is calculated by dividing your balance by your available credit. It's a major factor in your credit score, and it needs to be below 30% not to make a negative impact -- and the lower it is, the better.
You definitely don't want to make all your purchases costlier, make creditors richer, or hurt your credit -- so if you're among the 66% of Americans who let a monthly balance carry over from one month to the next, it's time to break that habit going forward.
How to avoid carrying a balance on your credit card
To avoid carrying a balance on your credit card, limit the amount you charge to the amount you can pay back in full when the bill comes due.
It's easier to do this if you live on a budget to make sure your spending is below your available income. If you have trouble sticking to your budget from month to month, track your spending to make sure your card balance isn't getting too high.
Virtually every credit card today has a website, and most have mobile apps too, so you can usually track your credit card balance online during the course of the month. Third-party apps such as Mint can also help you keep track of spending across all your cards. Check your balance every couple of days to make sure you haven't charged so much that paying off the bill will become unaffordable.
What to do if you're already carrying a balance
If you're one of the millions of Americans who are already carrying a credit card balance over from month to month, get serious about paying off what you owe. You can use a payoff plan such as the debt snowball or debt avalanche to aggressively pay down your debt.
You could also consider consolidating and refinancing debt using a personal loan or a balance transfer card. If you can lower the interest rate you're paying on current credit card debt, it will be easier to pay off what you owe.
As you begin working on debt payoff, commit to changing your borrowing habits in the future so your bill is always paid off and you don't find yourself facing this situation again.
You don't have to make this common credit card mistake
While around two-thirds of Americans may carry a balance on their card, you don't have to be one of them. Make a plan today to pay off your balance, live on a budget, and track your spending in the future so you can join the minority of Americans who never owe any interest to their credit card companies.
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