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Between the first quarter of 2022 and the first quarter of 2023, credit card balances soared 17 percent, according to the New York Fed’s Quarterly Report on Household Debt and Credit.
But it isn’t just this increase that’s notable. According to Ted Rossman, senior industry analyst at Bankrate, that change represents the largest year-over-year jump in the history of these reports going back to 2003.
Credit cards can be great financial tools that can help you build credit, give your budget some breathing room and earn you rewards. But if you’re not managing your credit card usage correctly, the result can be quite the opposite — and the negative impacts to your creditworthiness can be significant.
To ensure you’re taking advantage of the benefits of credit cards while avoiding their pitfalls and risks, here are 10 of the worst credit card mistakes you’ll want to avoid.
1. Paying late
Let’s start with the worst one. Late payments are one of the biggest credit card slip-ups you can make, and they stay on your credit report for seven years. That’s a long time to pay for a mistake.
The more late payments you have — and the longer your account remains delinquent — the more your scores will drop. If you wait long enough, your card will be charged off and your account will be sold to collections, which has its own negative impact on your credit rating.
Reporting by Experian found that, in Q3 2022, 1.67 percent of consumer accounts were 30-59 days past due, 1.01 percent were 60-89 days past due and 0.63 percent were 90-180 days past due — all of which represent an increase over Q3 2021 levels.
And while some delinquencies occur when consumers can’t afford to pay their bills, other research suggests that one of the primary reasons people pay late is that they simply forget to do so. To avoid this, set up reminders or automatic payments to make sure your payments are made on time.
2. Making only minimum payments
It goes without saying that you should make at least the minimum payment on your credit cards to avoid mistake #1. However, paying only the minimum amount due is a sure way to bury yourself in credit card debt for a long time — especially if you’re running a balance in the thousands.
A 2023 Bankrate survey found that more than one-third (35 percent) of all U.S. adults carry credit card debt from month to month. But calculating the impact of making minimum payments reveals the full financial impact of doing so.
If you have a credit card with a $1,000 balance and an interest rate of 20 percent, your minimum payment will likely be close to $27 per month (assuming it’s calculated based on your interest rate, plus 1 percent of your total balance).
If you only pay $27 a month, it will take you 117 months — nearly 10 years — to pay off your balance, and you’ll pay $1,056.74 in interest alone to carry your balance for that long. Paying more in interest than for your original purchases reveals why making only your minimum monthly payments can be such a big mistake.
3. Running high balances
It’s also a bad idea to carry a high balance or max out your card — and it’s not just because of the expensive interest you’ll be charged.
Your credit utilization ratio — that is, how much of your credit line you’re using — is a crucial factor in credit score calculations. As a general rule, if your utilization is higher than 30 percent, it can negatively impact your credit score.
Potential lenders take utilization seriously when determining whether or not to issue you new debt, as they may see high rates as a sign you’re not managing your debt responsibly. Don’t give them an opportunity to make such assumptions; instead, focus on keeping your credit card balances below 30 percent utilization, if not lower.
4. Not keeping an eye on transactions
Make it a habit to check your credit card activity regularly, whether by visiting your online account or reading your billing statement. If you see a charge you know you haven’t made, this can be a sign of fraudulent activity — and it can be very expensive to ignore.
Already, 127 million U.S. adults have been the victim of credit card fraud, and this number is expected to rise as cybercriminals become more sophisticated. As a result, the Nilson Report estimates that the U.S. card industry stands to lose $165.1 billion on these fraudulent dealings.
5. Not knowing your credit card terms
Credit card terms aren’t exactly a fun read, but it’s important to stay on top of them if you want to avoid being hit with unexpected fees and charges. Take the time to read the fine print on your statement — it’ll give you more information on your introductory rates, balance transfer fees and any other kinds of charges you can expect.
For example, if you have a 0 percent APR card, that doesn’t mean you’ll never pay any interest. That percentage rate is introductory and likely only lasts for the first 12 to 21 months after your account is opened. Paying off your balance in full by that date will help you avoid being charged the regular purchase APR.
6. Choosing a card that doesn’t fit your lifestyle
Not all credit cards are created equal, and they all serve different financial goals. So if you’re planning to get a new card, make sure you do your research on the best options for your needs and lifestyle.
For example, if you’re new to credit, look into student cards (if you qualify) or secured credit cards. But again, take the time to evaluate each card on its own merits. For instance, there’s rarely ever a good reason to get a secured card that charges an annual fee.
If you want to earn cash back rewards, there are cash back cards for all kinds of spenders. The same goes for travel. Some travel cards charge high annual fees but match them with impressive luxury perks, while others are more affordable and better suited for casual travelers.
Know why you’re getting a card, and take your research seriously. Signing up for a credit card is a financial commitment, so make sure you’re well-matched with your new plastic.
7. Overspending on your credit card
Overspending happens to the best of us — it can be easy to lose track of your credit card spending, since you aren’t feeling the sting of money immediately leaving your bank account. And if you convince yourself you can repay it later, it’s especially tempting to treat yourself to something special now.
But while it’s easy to see how this type of overspending can quickly land you in trouble with your credit cards, that isn’t the only mistake to watch out for. It’s also easy to overspend by chasing rewards.
Earning rewards should really be about getting something extra for the normal shopping you’re already doing. But when you start to make purchases simply to rack up the rewards, you’re not really gaining anything — and you could land yourself in hot water.
Think about it: If you normally spend $1,000 a month on a card that offers 1 percent cash back, you’ll earn $10 in rewards. But if you spend $1,500 and justify it by telling yourself the extra rewards will make doing so worthwhile, you risk adding $500 to your card’s balance just to gain an extra $5 in rewards.
8. Applying for too many credit cards at once
On the topic of credit card rewards, earning extra perks for your regular purchases can be a great feeling, but that doesn’t mean you should rush out and try to get all the cards you want at once.
Each card application triggers a hard inquiry on your credit report, which can knock a few points off your credit score. One hard inquiry won’t do much harm, but multiple inquiries add up. Plus, lenders may see this behavior as a red flag, if they assume you’re seeking access to multiple lines of credit at the same time due to financial distress. That’s why it’s best to be strategic with your credit card applications and space them out over time.
Generally speaking, it’s a good idea to wait at least 90 days between credit card applications, though waiting at least six months between applications leaves even more time for the negative impacts of each hard inquiry to fade from your credit report. If you expect to need a loan for a major purchase — such as a house or car — in the near future, you’ll want to be even more conservative (if not avoid new credit card applications entirely).
9. Canceling a credit card
If the idea of carrying a balance or running up interest charges sounds stressful, you may be wondering if it’s a good idea to just pay off your debt and close out your credit card accounts.
But before you cancel your cards, be aware that doing so may shrink your overall credit limit, increase your credit utilization ratio and impact the average age of the credit lines on your account — all of which can hurt your credit.
Imagine that you have two credit cards — one that’s been open for five years and has a $5,000 credit limit with a $1,000 balance, and another that’s been open for two years and has a $2,500 credit limit with a $2,000 balance.
Now, say you decide to pay off your older credit card. Here’s how your credit profile will change:
- Your total credit limit will decrease from $7,500 to $2,500. On its own, this may not be a problem, but it will impact your utilization ratio.
- If you pay off your older card without closing it, your utilization ratio will be 26.7 percent (based on a $2,000 balance and a $7,500 credit limit across both cards).
- If you close the older card, however, your utilization ratio increases to 80 percent (based on a $2,000 balance and a $2,500 credit limit on your remaining card).
- In addition, the average age of your accounts will decrease from 3.5 years to two years. Since the length of your credit history accounts for roughly 15 percent of your FICO score, this can cause your credit rating to decline.
Rather than closing your card, a better option may be to request a product change from the same credit card issuer to get a product that better matches your financial needs. For example, if the account you want to close is an annual-fee card that doesn’t offer you much value, see if you can downgrade to a no-annual-fee option.
10. Not requesting credit limit increases
This leads us to the last mistake on our list. As you can see from the example above, having access to higher credit limits can decrease your credit utilization ratio, which may improve your credit score (assuming your spending stays the same).
Currently, the average American has access to roughly $30,233 in credit. Requesting a credit limit increase for each of your cards once a year (unless your credit card issuer increases your credit line automatically) can be a smart way to maximize your credit rating.
Just be sure that increasing your credit lines doesn’t also increase your balance — otherwise, you’ll negate the benefits of doing so in the first place.
The bottom line
Credit cards can be a great complement to your overall financial strategy, enabling you to earn cash back, travel rewards and other perks on your everyday spending.
That said, credit card debt can be a slippery slope that quickly grows unmanageable if you aren’t careful. By avoiding the mistakes described above and continually educating yourself on financial best practices, you’ll empower yourself to stay safe with credit cards and enjoy all the rewards they can offer.