Credit cards are one of the most common pieces of plastic you'll ever see. So common that over 253 million Americans has at least one. However, credit cards are built on the idea that people make financial mistakes, which they certainly do.
Luckily, that doesn't have to be you. Let's talk about some of the most common credit mistakes and how you can avoid them!
The Basics Of Credit
This will be a very brief description of the fundamentals of credit that you'll need to know to understand these mistakes, so keep reading up if you want to know more!
To understand these mistakes, let's quickly go through some of the basics of your credit score. Your credit score is based on your payment history, credit card utilization, length of credit, total number of accounts, and hard inquiries.
That last one is when a lender inquires to get the full details of your credit report, which actually has a slightly negative impact on your credit score, but isn't a huge worry.
Types Of Credit
There are secured and unsecured lines of credit. A secured type could be a mortgage where the lender has collateral (your house) to take if you stop paying them. This makes interest rates low as they know they will be getting their money back one way or another. There are also secured credit cards where you offer something like cash upfront as collateral before borrowing!
An unsecured line could be a credit card or a payday loan with no collateral, which makes interest rates high and you'll want to pay off the balance as soon as possible.
Biggest Financial Mistakes: #1. Starting Too Late
You find yourself in your 20s with no credit. That's a huge mistake. What happens when you're 30 and you're looking to buy a house with only a few years of credit history?
Not having a single line of credit is a huge mistake. You may be thinking: "Why? I haven't needed it."
Maybe you haven't needed it yet, but the chances of never needing a loan in your life are slim to none. What happens if you decide to buy a house? Are you planning to pay it in full? What if your car breaks down right after another emergency expense? The average American only has between $1,000 and $5,000 in their savings. Is that enough to avoid taking out a loan?
Having credit established and being prepared for those situations is always best practice. Okay, but won't you be able to take out a loan even with no credit? Sure, but the interest rates are going to be high.
10% may not sound like a lot but think about that. If you take out a $20,000 loan for a car, that's an extra $2,000 you're paying right there just for not having credit established. 10% might even be hard to come by with zero credit. If that doesn't motivate you, imagine buying a $300,000 house!
If you're really worried about being responsible with the card, start with a secured line of credit. This is a line of credit that comes with collateral, which assures the lender they will get their money back. You could even put the money upfront for a secured credit card and essentially borrow from yourself to build credit!
#2. Making Minimum Payments
Honestly, the best thing you can do with a credit card is to pay it off at the end of the month. If you use it as a debit card and keep a close eye on the purchases you make, you could be earning money from your credit cards.
However, this isn't how credit card companies make money. They lose money if you are really responsible with your card. The way they make money and are able to reward your responsibility is by interest. How do they maximize the amount of interest they get? By people making the minimum payment.
If you have a pretty standard interest rate on your unsecured credit card, let's say 25%, and you borrow $10,000 on that line of credit. By making the minimum payment, which is probably something close to $50, you'll not only not be making a dent in your debt, but you'll be adding to it.
After one short year of making minimum payments with those figures, you'll be charged an additional $2,500 in interest. For one year. Don't fall for this trap. Do everything you can to pay off your cards at the end of every month, or at least get close to it.
#3. Spending Too Much
This really should be number one. It's easily the most obvious mistake one can make with a credit card, and it may also be the most common! You should be treating the card as if it were a debit card and not spending more money than you have.
That's in an ideal world, of course. Sometimes, you need an advance, and that's perfectly fine. We've all been short on cash before. However, you need to do everything in your power to keep your spending within reason.
If you have issues with overspending on credit cards, lock them away. Only use them for recurring monthly payments on a saved file and pay them off entirely at the end of the month. This will save you from temptation and continue to build your credit.
Have a Netflix account? Spotify? YouTube Premium? 17 other subscriptions? Sounds about right. The average consumer has 9 monthly subscriptions, so if you're already paying for them another way, there's no reason to not put them on your credit card and pay them off at the end of the month in full. You'll rack up some points and build your credit over time!
#4. Using Too Much
Even if you're willing to take the hit on interest by leaving a balance on your cards, do everything you can to keep it as low as possible. After payment history, the next most important factor on your score is credit card utilization.
Since this is specific to credit cards, it's important to take this seriously on your cards. Look at your total credit card limit (it should say it in your app or statement) and remember it. Ideally, you want to keep your utilization at the end of the month (for statement time) to under 10%.
Under 1% is considered excellent, under 10% is great, and under 20% is good. If your limit rises, great. Keep spending the same amount and keep the percentage as low as possible. If you leave over 40% on your card at the end of the month, it will impact your score.
#5. Canceling Cards
Don't cancel your cards. Keep them open, even if you find a card that you like better. One of the factors in your credit score is the length of credit, and it has a medium impact that's higher than hard inquiries and the number of accounts.
If you cancel a card that's in good standing, it could negatively impact your score and stay on your report for up to 10 years.
The way it factors it is by the average length of each line of credit you've opened. This is why it's important to start building credit as early as possible. Your auto loans are probably for a fixed length of 4 to 5 years, which means your credit cards need to last longer if you want to boost your average.
Again, keep something like monthly subscriptions on this card, or one regular expense you make like your morning coffee. Keeping it, making small purchases, and paying it off every month will only boost your score and earn you some rewards points. Not only is this good for the length of your credit history, but it also helps your total number of accounts, which has a lesser impact on your score, but still has an impact.
#6. Checking Your Score Often
Like we said, hard inquiries hurt your score. That's true even if you're the one trying to get the report. If you're applying for a loan, ask for a copy of the credit report so you don't waste a check. If you're dying to know, use Credit Karma for a good estimate. They aren't entirely accurate, but they get pretty close by using the same criteria as Transunion and Equifax.
#7. Choosing The First Card You See
Cards will make you offers all the time, and they may seem appealing. "Get a $200 welcome bonus when you spend $1,000 in the first 3 months of activation." Sound familiar?
Well, that really is great. If you're planning on a big purchase or if you use the new card just like your debit card and pay it off in full, you'll get a free $200 and a new line of credit to help your score!
However, that's a very small part of the long-term contract. Be sure to read reviews from customers and the features of the cards. Shop around and see what works for you. Be sure to look at things like APR, annual fees, late fees, whether or not you can use autopay, and more. This will help you make the right decision for your financial needs.
Don't apply to too many at once either. Pick one or two you really want to avoid an excessive amount of hard inquiries. Make sure you know when you need a new card before making the decision, too!
#8. Making Late Payments
Paying on time is the number one most important factor in your credit score. It has the highest impact on your report, above credit utilization, length of credit, and every other factor that's taken into account.
There are two types of late payments. There are late payments where you just have to pay a fee, and there are late payments that will cost you major damage to your credit score.
Less Than 30 Days
Depending on the lender, a payment that's a day (or two, or ten) late will result in a fee. It could be $5, it could be 1% of what you owe overall, and it could be a certain amount adding up by the day! This is just wasting money. Sure, you may never notice it. $5 a month doesn't sound too bad, but there really is no sense in wasting $60 a year. Remember, that's at the lowest end.
If you have trouble remembering to make monthly payments, either set up automatic payments on your card or set a reminder on your phone's calendar to make your payment on time.
More Than 30 Days
While a $5 fee will add up over time, it is still less of a concern than the other type of late payment. This is the type of payment that's more than 30 days late. This will affect your credit score, and it will affect it a lot. Not only will your credit score take a hit, but it will also stay on there for 7 years.
If you get a hard inquiry into your credit report from a lender, that may knock down your score by 2 to 5 points and it'll go right back to normal. The inquiry won't even show up on your report after two years.
However, a 30-day late payment could easily knock 50 to 100 points off your score. Once it hits 60 days, it's a lot more. If it hits 90, it's considered negligent and could absolutely tank your score.
#9. Don’t Give Up
Credit and financial health are a marathon, not a sprint. If you hit a bump in the road, there are always ways to improve your credit! You can even use a credit analysis tool to see exactly how to improve your score right now!
Get Help Today
If you've made some financial mistakes in your past, they don't need to haunt you for the rest of your life. You can use the services of a fast credit repair company to get your score back to where you want it! Stay up to date with our latest financial news and get a free consultation to help you today!