Do you understand how to use your plastic the right way? These common missteps can hurt your credit rating and your financial health.
At times, credit cards are a miracle, providing a simple way to get out of a tough jam — like when your car breaks down on the highway. As technology evolves, credit cards also make it easier to do simple tasks without cash — to pay a parking meter, say, or buy a movie ticket without standing in the line with the ticket seller.
But it should come as no surprise that just as credit cards make it easy to spend, they make it easy to overspend, and easier to ignore what the money is being spent on. On top of that, using credit cards comes with a price — in terms of annual fees or interest on balances if you’re not paying them off.
In short, they can be beneficial if used wisely, or they can wreak havoc on your finances and your credit if handled irresponsibly.
If you’re in the market for a credit card, first be sure you are choosing one that provides you what you are looking for, has the lowest interest rate and lowest fees and offers the most rewards. Here’s a great place to start comparing.
Then, know the 10 most common credit mistakes that can cause long-term damage to your financial standing and your access to loans when you most need them — and how to avoid making them.
1. Ignoring your credit profile
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When was the last time you accessed your credit profile and took the time to review the information in it?
It’s easy to assume that your report is stellar based on your past reviews. However, all it takes is one bad move on your part — or that of a fraudster who has stolen your identity — to lower your credit score.
Your credit report also may contain errors. “Common” mistakes on credit reports include errors in a consumer’s identity, incorrect reporting of an account’s status or balance and mistakes in processing and data management, according to the Consumer Financial Protection Bureau. A few examples:
- You might find someone else’s credit information in your report.
- Your closed account may be reported as “open” (or vice versa).
- Errors you thought had been corrected may reappear on your credit report.
These mistakes aren’t simply frustrating. Credit report mistakes can cost you money — from higher interest rates, smaller lines of credit or credit denied — if they make you look to lenders like a worse credit risk than you are.
2. Taking cash advances
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A cash advance on your credit card is actually a short-term loan — an expensive one. A cash advance involves much higher fees than a cash withdrawal using an ATM or debit card. Get ready to pay not only an ATM fee but also a steep cash-advance fee. And that’s not all: You’ll pay a steep interest rate — usually higher than your credit card’s rate for purchases. In addition,unlike with purchase charged on your card, interest charges start accumulating immediately, usually from the day you take out the loan.
Don’t use a cash advance if you can help it. If you must, pay it off as quickly as possible because the costs keep multiplying until you do.
If you need a loan, explore other ways of getting it that aren’t as expensive.
3. Paying bills late
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Picture this: You’ve been struggling to make ends meet. Instead of calling your creditors to see if any payment arrangements are available, you ignore the accounts. A few months go by, and you receive an alert from a credit score monitoring service. The news: Your credit score has plummeted.
Unfortunately, it takes just one late payment, as little as just 30 days late in some cases, to tank your credit by as much as 100 points (depending on how high your score was before the delinquency). The better your score, the more severe the hit. That’s not all: You’ll also pay a late fee. Your card company also might raise your interest rate if you’re late repeatedly.
4. Exceeding your credit limit
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You’re probably well aware that once you reach your card’s credit limit, denials at the point of sale are to be expected.
Some card companies will ask you to approve over-limit fees. “If you have agreed to permit over limit charges, you generally can be charged a fee of up to $25 the first time you exceed your credit limit and a fee of up to $35 if you are over your limit a second time within six months,” the Consumer Financial Protection Bureau says.
When you do go over your limit, expect a hit to your credit score. That’s because your credit utilization ratio accounts for 30 percent of your FICO score.
5. Applying for too many cards
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Applying for lots of cards? Stop. Too many applications for credit signal desperation to lenders. Excessive “hard” inquiries, noted in your credit files when you apply for credit, can lower your FICO score, particularly if you’re new to the credit world.
6. Responding to offers in your mailbox
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It may be hard to pass up bonus points, miles or cash back offered to new customers of rewards credit cards. But understand this: Preapproved offers don’t guarantee that you’ll be approved. Think it over. You may not need that card. If you rarely leave town, for example, what good is a frequent-flier card?
7. Abruptly shutting down accounts
If you are thinking of closing a credit card account because it’s no longer useful, just be aware that this could affect your credit score. Closing an account increases your credit utilization ratio (that’s the proportion of the credit you are using compared with that available to you.) Credit utilization is a big part — 30 percent — of your credit score.
Closing an account doesn’t make it disappear. You’re still liable for the outstanding balance and a closed account remains on your credit report for seven to 10 years.
8. Ignoring statements
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Like your credit report, your bank and credit card statements may have mistakes, whether from human error or credit card fraud. But if you don’t open and read those monthly statements you’ll never spot the problems. It’s a good practice to examine your account activity on a weekly basis to catch any problems early.
You’re not liable for fraudulent transactions on a credit card unless you wait longer than 60 days to report the error to the card company. It’s your job to keep an eye out for mistakes.
9. Applying solely based on a promotional offer
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It seems like every time I’m in a department store, the clerk at the register always finds a way to squeeze a sales pitch about some irresistible store credit card offer I should take advantage of.
I politely decline, but I’m definitely thinking: “Receiving a measly 15 percent off my purchase does not make up for all of the high interest and fees that come with these cards.” In other words, the costs outweigh the benefits.
I’m not suggesting that you refrain from signing up for a card that will actually be of major benefit to your family (i.e., free travel and cash back). Just be sure that the annual fee won’t swallow up all the perks. And if you carry a balance on a rewards card, the higher interest rates these cards generally have will nullify the benefits.
10. Failing to read the fine print
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When you apply for a credit card, you are agreeing to take full responsibility for any legitimate charges made with the card. So you definitely can’t afford to ignore the disclosures.
Fortunately, even if you make a few mistakes along the way, credit can always be repaired over time. (Check out our credit restoration page for help with that.) But it’s easier to avoid these 10 credit card sins.
What lessons have you learned using credit cards? Share with us in comments below or on our Facebook page.
Marilyn Lewis and Kari Huus contributed to this post.