Credit cards are ubiquitous these days — almost everyone has one and, of those who don’t, almost all of them should. However, even though they are commonplace, the intricacies of handling your own credit card account are lost on a lot of people. While most of us can make routine purchases and pay our bills on time with relative ease, it’s still possible to commit huge mistakes with a credit card. If you’re just getting your first credit card or you’re a seasoned cardholder with an interest in improving your credit, learn about these mistakes to protect yourself from unnecessary fees and keep your credit score high.
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Benefits of Having a Credit Card
There are lots of horror stories about the mistakes that cardholders sometimes make. We’ve all heard of someone who overcharged their credit card, made a purchase they couldn’t afford, or lost track of their billing schedule. With everything that could go wrong, it’s enough to make anyone wonder: wouldn’t it be better not to have a credit card at all?
The answer is no — it is absolutely a good idea to have a credit card… as long as you manage it well. Responsible credit card use helps you to build your credit. By making routine purchases with a credit card and paying them off in a timely manner, you can prove to credit agencies that you have what it takes to take on more serious forms of debt. Improving your credit score in this way can help you get better deals on things like personal loans, mortgages, and even other credit cards, not to mention racking up the rewards that often come with using a credit card.
You can only use a credit card to improve your credit score if you know what kinds of mistakes to avoid. Here are some common ones that many cardholders inadvertently commit.
Never Pay Extra Fees
The first rule of owning a credit card is that credit card companies are not your friends. While they may help you out from time to time, these companies are mainly interested in making money. Sometimes this money comes from retailers — who will pay fees in order to accept credit cards — but it can also come from the consumer. One of the easiest ways that credit card companies can get money from you is to charge you superfluous fees. Companies know that many cardholders won’t bother to challenge these fees, so they can rake in easy money here and there.
Be wary of fees that credit card companies try to charge you. Approach every fee with a skeptical eye and find out which fees are optional and which are easily avoidable. Above all, never pay an unnecessary fee.
Don’t Get Hit With A Charge-Off
One of the worst things that you can do with a credit card is to fail to meet your billing schedule. However, we’re all prone to mishaps from time to time and it’s easy to misplace a credit card statement or forget to make a payment until after the due date. By itself this isn’t the worst thing in the world. What is the worst thing is to assume that there’s no difference between a minimum payment that’s one day late and a payment that’s six months late. In fact, after 180 days your credit card company will assume that your charges are a loss for that fiscal year.
This does not mean that you are safe from having to pay off that credit card debt. Far from it, in fact. Many credit card companies will send debt collectors after you, depending on the size of your balance, but, even worse, they will also put a charge-off on your credit report. Having a charge-off can do enormous damage to your credit score, potentially forcing you to seek credit repair before opening new accounts.
Once you have a charge-off on your credit report, you will either have to negotiate with your credit card company or wait seven years for it to be removed.
Avoid Carrying a Balance on Your Card
One of the big questions that comes with having a credit card has to do with how much your balance should be. Should you use your credit card often and carry a balance from month to month, making only the minimum payments expected of you? Or is it better to pay off your balance each month, carrying a balance of $0 whenever possible?
Although experts disagree on the exact percentage, many think that it’s best to carry a balance that’s less than 30 percent of your credit limit. If you’re going to carry a balance at all, that is. The best balance to carry will always be $0, as long as you’re able to do that and keep up consistent usage of your credit card. One good idea for this is to use your credit card to pay your bills. This way you can avoid spending too much, but still use your credit enough to build a strong credit score.
Know the Right and Wrong Ways to Use Revolving Credit
Credit cards are a type of revolving credit. Revolving credit is another word for any kind of credit line that gets renewed month over month. Credit cards are probably the paradigm example of revolving credit — each month your credit card company gives you a certain amount of credit that you can spend. At the end of the month, they expect you to make a minimum payment on what you spent and, if you can’t pay off your entire balance, your credit limit for the next month will be slightly lower to account for your outstanding balance.
While making use of revolving credit is great for building your credit score and purchasing many items, it’s not the best idea for all purchases. Large expenditures near or above your credit limit may be better purchased with non-revolving credit. Non-revolving credit includes loans, which can carry a much lower interest rate and personalized repayment terms compared to your credit card.
Don’t Cancel Credit Card Accounts at the Wrong Time
Sometimes when you are faced with a complex financial situation or you are worried that you will be unable to maintain your credit cards, it can be tempting to close your account. However, closing your account at the wrong time can actually do a lot of damage to your credit score. Here are some situations to avoid closing your account in.
- It’s your only account. If you only have one credit card account open, then it’s important to keep it open so that you can continue to build good credit history. Closing it will leave you with nothing, which will make future lenders less eager to work with you.
- It’s your oldest account. Similar to above, old accounts are great for your credit history. They show lenders that you have what it takes to stick with an account and make payments over a long period of time.
- It still has a balance. Before you close any account, make sure that the balance is paid off. If your account still has a balance on it, it may appear as though you are trying to avoid your debt.
Credit cards can be a great financial tool if you use them responsibly. Avoid committing these common credit card mistakes and you will be well on your way to building up a strong credit history.
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