Credit cards are among the most widely used financial products in the world. In fact, according to the Consumer Financial Protection Bureau, nearly half of all Americans hold at least one credit card, and it’s easy to see why – they’re simple to use, accepted at most every business and more secure than ever.
While the chances are high that you’ve got a credit card in your wallet right now, it’s important to know how to take full advantage of the unique solutions they provide by avoiding these top five mistakes.
1. Using Your Full Credit Limit
Though you technically have your full credit limit available to use, it’s best not to use all of it.
One important factor in determining your credit health is your credit utilization. Credit utilization is the balance on your credit card – which is reported to the major credit bureaus every month – compared to the total credit you have available in that account, also called the credit limit. Experts say anything below 30% is good, but only utilizing somewhere between 1-10% is ideal.
Not only does a good credit utilization rate improve your credit score, using less than your maximum available credit can also help you stick to your budget. Credit card companies may raise your limit periodically, even if you didn’t request it.
It can sometimes be difficult to maintain your self-control when it comes to credit spending. The most important thing to remember is that every penny spent on credit must be paid back – don’t confuse credit with free money.
Decide what you can reasonably afford to spend and pay back each month and, except for emergencies, stick to that number regardless of your credit limit.
2. Late Payments
Keep this advice in mind for both credit cards and any type of loan you may have: Always make your payment in full by its due date.
Contrary to popular belief, carrying a balance month-to-month does not improve your credit score. It’s much better to pay your card off – often referred to as the statement balance – each billing cycle. Consistently on-time payments will raise your score and show other lenders you’re reliable and financially responsible.
Furthermore, late payments come with interest charges, and they’re typically hefty ones. According to WalletHub, the average credit card rate in 2023 is between 19-23% and can go as high as 30%.
Over time, the amount paid in interest on rates that high is staggering. Take an interest rate of 23%, for example. An unpaid balance of $1,000 each month would cost you an extra $230 a month – more than $2,700 per year – in interest alone, and that doesn’t even include any late fees you might incur on top of it.
3. Using Multiple Credit Cards for Their Rewards or Rates
Ever heard the saying, “Don’t spend a quarter to save a nickel?” That principle applies to credit cards as well. The appeal of rewards such as airline points and cashback can be persuasive, but don’t apply for multiple credit cards for the benefits alone.
Not only does each new card application impact your credit score, but having several cards to keep track of can make budgeting much trickier and you may find yourself falling down a rabbit hole of overspending and a cycle of nasty late fees. As a general rule, the simpler you make your finances, the easier it will be to manage them and stick to your budget.
Credit bureau Equifax recommends people have no more than two or three cards open at a time. This amount helps you build credit and learn financial responsibility without being overwhelming.
That said, the way you use your credit cards is far more important than how many you have. Having one or two cards you pay down each month will keep your credit score much healthier than having five cards that you always pay partially or late.
4. Not Reviewing Your Statements
It can be easy to get in a routine of just checking your bill amount, making your payment, and moving on. However, taking a few extra minutes to review your statement regularly can really pay off in the long run.
Reviewing the charges for errors and unknown transactions ensures you’re only paying what you should be and helps catch fraudsters earlier, which typically increases the likelihood of getting any mistakes corrected before they impact your credit score or your wallet.
5. Not Doing Your Research First
There is no card out there that’s a one-size-fits-all. The card that’s right for you will depend on your needs and how you intend to use it. Make sure you thoroughly research all your options and review the fine print before applying.
For example, if you frequently travel internationally, you may want to look for a card that doesn’t charge a foreign transaction fee and accrues airline points as a reward. On the other hand, you may care more about a lower interest rate and fraud protection and opt for a card that meets those needs instead.
Whichever card you go for, keep these tips in mind and see the difference it can make in your financial future!
OMB and its affiliates do not provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decision.
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