Published in: Credit Cards | Oct. 10, 2018

The 8 Biggest Credit Mistakes That Can Pinch Your Wallet

By:  Lyle Daly

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Save money and keep your credit score high by avoiding these 8 of the biggest credit mistakes. Shocked woman with credit card in hand looking at credit card score on iPadImage source: Getty Images.

Despite how important credit is, many consumers take a haphazard approach with theirs. Sometimes this is due to poor financial habits, and sometimes it’s just because of not having enough knowledge about credit.

These mistakes aren’t something to take lightly, because they can end up costing money and damaging your credit score. Here are the most common and biggest credit mistakes that you should always avoid.

1. Maxing out credit cards

A credit limit isn’t an invitation to spend up to that amount. One of the ways consumers, especially those new to credit cards, get into trouble is by overspending. And the worst level of overspending is maxing out your credit card.

Once you reach your credit limit, your card issuer will either deny future transactions or charge you an over-the-limit fee. If you have an emergency and need your credit card, you won’t be able to use it. You’ll be paying interest on that balance every month, and you’ll have high credit utilization, which is bad for your credit score.

2. Paying the minimum

Although minimum payment amounts vary by the card issuer, it’s always a small portion of your balance. For example, several card issuers go with 1% of your current balance plus interest or $25, whichever is greater. When you only pay the minimum, credit card debt lasts much longer and costs you a substantial amount of interest.

Here’s an example of the difference between making minimum payments and making a larger, fixed payment:

Balance

APR

Monthly Payment

Time to Pay Off Balance

Interest Paid

Total Paid

$3,000

17%

$73 (minimum)

63 months

$1,529

$4,529

$3,000

17%

$146

25 months

$571

$3,571

 Source: Author calculations

An extra $73 per month will save you more than three years of credit card debt and almost $1,000 in interest. The smartest strategy with credit cards is to pay the statement balance every time to avoid interest entirely, but if you can’t do that, at least pay as much as you can.

3. Paying late

Late payments carry several potential consequences depending on how late they are:

  • When you’re even one day late, your card issuer can charge you a late fee.
  • Card issuers can also cancel any 0% APR offer you had after one late payment.
  • At 30 days late, your payment history will be affected, causing your credit score to drop.
  • At 60 days or later, your card issuer can apply an increased penalty APR to your account for six months.

Whether you need to set up payment alerts or automatic payments, it’s imperative that you pay your credit card bill on time.

4. Being a cosigner

Whether someone’s asking you to cosign on a loan, a credit card, or an apartment rental, it’s probably not a good idea.

When you cosign on a contract, you’re taking the same responsibility as the person signing it. If they fail to make their payments, the creditor could come after you for the money. A missed payment or default would go on your credit history.

It’s tempting to help friends and family when they ask, but you shouldn’t put your credit in someone else’s hands.

5. Opening too many store credit cards

Retailers often rope you in to applying for their credit cards by offering a discount on your purchase. If you shop at a store frequently, then a store credit card may be worth getting. But you shouldn’t open a credit card at every store you visit.

I’m all for opening multiple credit cards, provided you open the right cards. Store credit cards tend to have higher APRs, lower credit limits, and inferior rewards compared to the top cards. The main perk with store credit cards is the discounts many offer on your first purchase, but even those discounts pale in comparison to the what’s offered with credit card sign-up bonuses.

6. Closing credit cards

The logic behind this is sound. If you’re not using a credit card or don’t want it anymore, you’d think that closing it would be the way to go.

The problem is that you’ll lose that card’s credit limit, lowering your available credit. If you have any balances on your remaining cards, your credit utilization will increase and possibly lower your credit score. And if you closed a card that you had for a long time, your average account history will decrease, which can also lower your credit score.

Closing a credit card isn’t always a bad thing, but it’s usually better to keep the card open. With cards that have annual fees, you can try downgrading to a no-annual-fee alternative.

7. Not monitoring your credit history

If you aren’t staying on top of your credit, then you’re essentially relying on the credit reporting bureaus to get everything correct. Considering an FTC study found that 1 in 4 consumers identified errors on their credit reports, I wouldn’t recommend playing the odds.

You can and should request your credit report from the three major bureaus every year. A free credit monitoring service is also a smart way to receive notifications whenever any new credit inquiries are made using your information, so you can make sure that it’s for something you authorized.

8. Not shopping around for the right card

I was guilty of this myself for several years. If you’re not using a credit card that aligns with your financial goals, then you’re leaving money on the table.

Working on credit card debt? A balance transfer card could save you hundreds to thousands of dollars in interest. Do you pay your credit card bill in full every month? A good cash-back card will earn you much more back than the basic credit card you got when you were first building your credit.

Your credit can either help you or hold you back in life. By steering clear of these common mistakes, you can improve how you manage your money and use your credit to your advantage.

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