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These 5 credit card mistakes can negatively impact your credit score and lead to debt

September 28, 2022, 8:48 AM UTC
A yellow card lying on top of a wallet holding a blue and red card.
Rewards credit cards are designed to encourage you to spend—just make sure not to buy more than you normally would—or should.
Photo Illustration by Fortune: Original Photograph by Getty Images

Credit cards are a useful and convenient financial tool. When used responsibly, they can help consumers build credit, finance purchases, and in some cases, earn rewards such as cash back or miles. These benefits are enticing but come at a high cost if you’re not careful.  

One misstep—a missed payment or a growing balance—and credit cards can hurt your credit score and put you in the red. It can be so easy to swipe or tap for any purchases without thinking about how much your spending, making it easier to blow your budget than paying with cash.

To get the most out of your credit card, here are five common credit card mistakes to avoid—and best practices to follow.  

1. Carrying a balance  

When paying for a transaction, you can use a credit card like any other form of payment. But unlike a debit card or cash, you don’t have to pay for that purchase right away. That can be convenient in some cases, but if you don’t pay off your balance in full by the due date, you’ll end of paying interest charges.  

“The most important thing to know about using a credit card is that there are winners and losers in the game,” says Richard Barrington, financial analyst for Credit Sesame. “If you choose a no-fee credit card and pay what you owe every month, you’ll get to use it as a convenient cash substitute without it costing anything extra.” 

Carrying a balance month to month can get expensive, and fast, as some credit cards charge interest that compounds daily. Data from the Federal Reserve Bank of St. Louis shows that as of May 2022, the average interest rate on credit cards stood at 16.65%.

The smartest way to use a credit card is to never charge more than you can afford to pay off when your bill comes due.

“The key is to not let your spending get too far ahead of your income—you should use credit only when you have a plan to pay back what you borrow promptly,” says Barrington. “Otherwise, you can be left with less money to spend in the next month, late fees, a damaged credit payment history, and so much more.” 

Of course, life happens and paying your balance in full may not always be possible. In that case, you should continue to make minimum payments to avoid consequences like late fees and a penalty APR, which we’ll dive into below. If you can pay more than the minimum, that can at least minimize the interest.

2. Using most or all of your credit limit  

Credit utilization, sometimes referred to as “amounts owed” on your credit report, plays a big role in your credit health. This number represents your total balances divided by your total credit limit and gives a snapshot of how much credit you’re using.  

Let’s say you have three credit cards. Credit card 1 has a limit of $2,000, credit card 2 has a limit of $5,000, and credit card 3 has a limit of $10,000. Combined, your total available credit is $17,000.   

If you have a balance of $500 on credit card 1, a balance of $2,500 on credit card 2, and $3,500 on credit card 3, you’re using $6,500 of your total credit.  

Given the credit utilization ratio formula of dividing balances by the limit, you’d take $6,500 and divide it by $17,000.  

6,500/17,000 = .38  

Multiply that by 100 to get a percentage and your credit utilization ratio is 38%, which is above the recommended amount.  

This is a big deal, because next to payment history, which accounts for 35% of your credit score, amounts owed make up 30%. So if you carry a large balance (or balances) and you’re close to maxing out your limit(s), you could see a drop in your score, signaling to lenders you’re a potential credit risk.

The typical advice is to keep your credit utilization ratio under 30%, but some financial advisors recommend going even lower to 10% or less.

If you do find your credit utilization ratio regularly creeping above 30%, and you have no problem paying off your balance, you might want to ask your credit card issuer(s) to increase your credit limits.

3. Taking cash advances   

One of the major credit card mistakes to avoid is taking out a cash advance. A cash advance is when you use the line of credit associated with your credit card to take out cash from an ATM. This can sound convenient in theory, but it’s not a sound financial move.  

“A cash advance can seem like a quick and easy solution if you don’t have enough money readily available in your checking account,” says Elly Szymanski, assistant vice president of credit card products at Navy Federal Credit Union. “But be aware that you’ll typically pay extra fees and receive a higher interest rate than the rate for regular card purchases. There’s also no grace period for repayment. Unlike a credit card purchase, interest and fees usually start to accrue immediately.” 

Cash advance fees may be up to 5% of the amount you withdraw, and the APR can be anywhere from 20% or more. The high APR, additional fees, and no grace period are a recipe for a high-cost, short-term loan that likely isn’t worth it.

Also, it can be a slippery slope to treat your credit card like your personal ATM with a cash advance. You don’t want to start that habit and get into credit card debt and pay even more in interest and fees.  

4. Making late payments  

One of the easiest credit card mistakes to fall into is making a late payment. Life gets busy with work or family obligations, and you forget to pay your credit card.  

And your payment history matters a lot and has the biggest effect on your credit score.  

“Missed payments will incur penalty fees on top of interest charges, and if you don’t pay down your balance, you’ll pay interest on it for a longer time, plus pay interest on any fees and previous interest charges,” says Barrington. “And lastly, missing payments could prompt the credit card company to raise their interest rate.” 

And credit card late fees can be expensive: According to a Consumer Financial Protection Bureau (CFPB) report on credit card fees, as of 2019 the average late fee was $26.

To make matters worse, if you make a late payment, it will hurt your credit score and can stay on your credit report for a long time—up to seven years.  

Setting up autopay for your credit card, signing up for alerts, or creating calendar reminders can help eliminate this issue.  

5. Chasing rewards  

Rewards credit cards are designed to attract consumers with various benefits such as cash back or miles that can be redeemed for travel. Even if you pay your credit card balance in full, there’s one way this type of card can hurt your finances in an insidious way: spending more than you normally would—or should.  

It’s great to get rewards for day-to-day spending, but you may be tempted to put more on your credit card just so you can earn more points and miles. Studies have illustrated that consumers tend to spend more when using a credit card.

Getting rewarded for spending can entice you to spend even more, which can lead to overspending, which may impact your savings or available cash, or even lead to debt. If you can stick to a spending plan and pay off the balance, the rewards can be the bonus they’re intended to be.  

5 best practices when using credit cards  

To avoid these common credit card mistakes consider these best practices:

  1. Spend only what you afford to repay. A credit card is not “free money” or a game to take lightly. Charge only what you can easily afford pay back.
  2. Keep balances under the 30% benchmark. Going beyond this credit utilization benchmark may hurt your score. Having low balances shows lenders that you can handle credit and you don’t need access to more.  
  3. Always pay on time. Paying off your total balance by the due date is best. Can’t pay in full? Make the minimum monthly payment. Sign-up for alerts or autopay to prevent missed payments.  
  4. Consider the pros and cons of closing your credit card. If you have a credit card with an annual fee and you no longer use it, it may make sense to close it. However, there’ll likely be a drop in credit score due as it impacts the length of your credit history and utilization. If there is no fee and your credit card isn’t a tempting tool to spend, consider keeping accounts open to help your credit history.  
  5. Review fees, due dates, and APRs. Know all your important credit card numbers, such as total fees, when your payments are due, and the interest rate you could be charged.  

These credit card best practices can help you maximize the benefits of using a credit card, while minimizing the risk of hurting your credit and paying unnecessary fees.  

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