When you hear the phrase “credit card mistakes,” you probably think of out-of-control spending. However, even people without major credit card debt often use their cards unwisely without ever realizing it. Be sure to educate yourself and avoid the following common pitfalls.
Not understanding interest charges. This is the No. 1 biggest mistake consumers can make when it comes to any type of credit. Pay close attention to interest rates when signing up for new cards and always try asking for a better interest rate. Remember that many cards will offer introductory rates that are low for the first year but then skyrocket. Also avoid being tricked by deferred interest rates; interest still begins at the day of purchase unless you pay off the full amount by the end of the deferment period. Keep in mind that cash advances, unlike normal credit card purchases, usually accrue interest even when paid in full at the end of the month.
Using too many cards. Opening too many credit card accounts can hurt you in two ways: Having more cards will make you more likely to overspend; you can better avoid massive credit card debt without the ability to accrue it. Consequently, potential creditors sometimes see having many different cards as a liability.
Closing old accounts. While too many cards are bad for your credit, so is closing the ones you already have. A major component of your credit score is your debt-to-limit ratio, or “utilization rate.” This rate is essentially the amount of debt you have divided by your total amount of available credit. When you close old accounts you no longer use, you lower the amount of your total available credit. Unless you also pay off at least a proportional amount of your debt at the same time, your utilization rate will jump, negatively affecting your overall credit score.
Not paying attention to credit limits and/or carrying a high balance. Even if a card is paid in full each month, a balance close to its maximum can hurt your credit. Do your best to keep your balance on each card at no more than 80 percent of its limit at the end of every billing cycle.
Making late payments. If you’re in a financial situation where bankruptcy is an option, avoiding even minimum card payments may be tempting. Remember that regular repayment is the No. 1 way to build your credit rating and that missing payments hurts your score. Additionally, while you should ideally pay your bills on time every month, also keep in mind that late payments made within 30 days do not count toward your credit score.
If, like many Americans, you have already made these mistakes and find yourself dealing with insurmountable credit card debt, remember that bankruptcy is a tool you can use to wipe the slate clean. There is, however, one last blunder that will be much more difficult to recover from:
Maxing out cards before declaring bankruptcy. When considering bankruptcy, maxing out your cards can be another temptation. While declaring bankruptcy discharges credit card debt, purposefully overusing your cards is an easy trend for creditors to spot. If that happens, filing for bankruptcy may be considered fraud and challenged in court.