Using credit cards wisely can be a great thing. Using a credit card smartly can help improve your credit score, making future borrowing easier and cheaper. Many cards also offer generous rewards, so you can actually earn free travel or even cash back just for your routine daily expenses.
The key, however, is that cards are a good thing. if they are being used wisely. Unfortunately, they can also hurt your personal finances if you make mistakes while using them. In particular, there are three big mistakes to watch out for.
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1. Maximize your credit cards
Maximizing your cards means charging up to the limit that the cardholder sets for you. For example, if you have a $ 5,000 line of credit and load $ 4,999 on your card, you have reached your maximum card limit.
There are a number of reasons why maximizing your credit cards could be a big mistake. You could end up with a really tough balance to pay off, on the one hand. But one card at maximum can also seriously damage your credit score.
In fact, using more than 30% of the credit you have can lower your score. This is because the credit utilization rate is one of the most important factors that credit reporting agencies and lenders look at.
Maximizing your card also exposes you to over-limit fees if you exceed the amount you are allowed to spend. And you won’t have any available credit in case you need it. To avoid this mistake, cap the amount you spend on your cards and stay well below that all-important 30% threshold.
2. Pay only the minimum due
Credit card companies set very low minimum payments. They benefit when you only pay the minimum required because your payment will usually barely cover the interest charges. You will end up paying off your balance for years and years, making little progress in paying off your credit card debt, despite sending out a check every month. Over time, you can end up paying tens of thousands of dollars in unnecessary interest charges.
To avoid this, pay more than the minimum each month. Ideally, the best thing you can do is pay off your entire balance when you receive your statement so that you never have to pay interest. If that’s not possible, send as much as possible with each payment so that you can reduce your balance quickly and avoid getting stuck in a debt trap where your hard earned money is sucked up because of interest charges.
3. Missing payments
When you fail to make credit card payments, you will be charged a fee in most cases. But you will also damage your credit score. Once a payment is at least 30 days late, credit card companies will report it to major credit bureaus. Even a single missed payment could drastically reduce your score and a missed payment history could make it very difficult and expensive to obtain any type of loan.
To avoid this, set up automatic payment if you can. Or, if you’re worried about overdrafting your bank account, set a calendar reminder instead to make sure you pay your bill before the deadline.
If you can avoid missed payments, fall into the minimum payment trap, or maximize your cards, you are well on your way to using credit cards successfully to help improve your financial situation.