A credit card could be an excellent way to pay for your purchases, offering rewards and helping to create a strong credit history. However, in today’s fast-paced world, managing your finances is essential, particularly when it comes to your credit. If credit cards are not used responsibly, it can result in penalties and fees. Read on to uncover the five common mistakes to avoid when using credit cards.
If you want to maximise the benefits of credit cards, you can start by developing good financial habits and avoiding bad ones. Here are credit card mistakes you must avoid:
1. Paying Only the Minimum Balance
The credit card issuers allow you to pay the minimum balance and the complete billed amount to date. However, paying only the minimum amount is not an effective long-term strategy. Paying the minimum amount could be affordable and convenient, but it can result in a debt cycle. This is because interest is charged on the unpaid balance.
Even when you pay only the minimum amount, the interest charges will be collected on the accumulating balance, keeping you from a good credit score range. Thus, making your credit card bill payment completely and on time is always recommended. If you can’t pay the total due, always try to pay off as much of the balance as possible.
2. Not Maintaining Credit Utilisation Ratio
Using most of your available credit limit leads to a high credit utilisation ratio. The percentage of your available credit that you are utilising is called the credit utilisation ratio, calculated by dividing the total outstanding balance by the total credit limit.
A higher credit utilisation ratio can negatively impact the credit score. It is highly recommended that the credit score should be kept below 30% to stay in a good credit score range. But if you are on the boundary of crossing your credit limit, try to pay in cash for your subsequent purchases.
3. Applying for Multiple Cards at Once
Whenever you submit a credit card application, your lender extensively investigates your credit score. When you’re looking for certain types of loans, such as auto loans or mortgages, multiple inquiries in a short period only impact a little because they are all considered as one enquiry when calculating your credit score.
However, this is different with credit cards. When you submit an application for several credit cards, each inquiry indicates financial instability for lenders, such as heavy debt or insufficient cash. Your credit score is influenced even if the lender approves your application.
Avoid applying for multiple cards frequently. If you want a new credit card, apply after six months of taking the previous card. The six-month period ensures that even if an extensive inquiry lowers your credit score, it will have time to recover before your new credit card application.
4. Closing Your Credit Card Account
Sometimes, you may be burdened with managing multiple credit cards and decide to close them. The average length of time you have credits is one of the crucial factors determining your credit score. As soon as you close a credit card, you lose the credit immediately, which could result in an increased credit utilisation rate, impacting your credit score.
Thus, it is recommended not to cancel your credit card, particularly the first one. However, when the annual fee is levied on your card, it is best to cancel it.
5. Not Choosing the Right Card
Building and maintaining strong credit helps you to get your loans approved quickly and with better rates. Thus, choosing a card you manage well is essential because bad credit can damage your financial reputation.
Choose a card that fits your needs appropriately. Consider whether your chosen card will build or repair your credit score. Choosing a card that could be more optimal may lead to unutilised opportunities for beneficial rewards or paying additional interest charges. Thus, choosing a card that matches your financial goals while considering costs and benefits is essential.
Final Thoughts
Avoiding credit card mistakes is crucial to maintaining a healthy credit score. Make a goal to use your cards responsibly and clear debt every month. To uplift your financial journey, choose a card that fits your requirements.