We all know that credit can be confusing. When it comes to using credit cards, some people use them to pay for every expense and there are others who avoid them at all costs. If you use credit responsibly, it can be very rewarding and can even improve your credit worthiness which will help when you buy a house, purchase a car, or even find a job. However, there’s more to building and maintaining good credit than just paying your bill on time each month. Here’s a list of some of the biggest mistakes you can make (and things you should avoid) when it comes to managing credit card debt.
1. Do not pay late! Always make timely payments on all credit card bills. Your payment history makes up 35 percent of your credit score and if you fail to pay your bill within 30 days, you will be reported late to credit reporting agencies, and this negative information can remain on your file for up to seven years. In most cases, you will also be charged a late fee.
2. Don’t spend more than you can afford to pay back. If you are granted a high line of credit, it can be tempting to buy those expensive shoes or splurge on a vacation. Just because you have a high line of credit does not mean you can necessarily afford those purchases. If you only charge what you can afford to pay back at the end of the month, you will avoid paying more in interest and it will significantly decrease your chances of accruing credit card debt.
3. Don’t pay only the minimum. Paying the minimum every month will bring you into a cycle of credit card debt. It will increase the life of your debt and you will end up paying much more in interest. Use this cost of credit calculator to find out how much extra you might pay on credit card purchases.
4. Do not use your entire credit limit. If you charge your whole credit limit or close to it, this will have a negative impact on your credit usage ratio, which will have a negative impact your on credit score. If your usage is high, then you may be seen as more risky, and creditors may not extend you a larger limit. (However, also note that they may have the same reaction if you use very little or none of your available limit.) Watch this video to learn how to calculate your credit usage ratio.
5. Never take out a cash advance. Cash advances on credit cards are a very expensive way to borrow money. Interest rates on cash advances are often 10-15 percent higher than the interest rate charged on regular purchases. Also, you will be charged a cash advance fee ranging from 2-4 percent and you will also be charged an ATM fee. Taking out a cash advance could also be a sign of a bigger financial problem.
6. Avoid closing credit cards with a balance. When you close a credit card that has a balance, your available credit or credit limit on that card is reduced to zero and it looks like you have maxed out the card. Since outstanding debt accounts for 30% of your credit score, this will have a significant impact on your credit score.
7. Do not ignore your credit accounts; check your accounts daily. Reviewing your accounts on a daily basis is the only way to know if your credit card information is being misused by an identity thief or to know exactly how much you have spent and how much you owe.
8. Never use your credit card to make purchase on unsecured websites. When shopping online, make sure the site is secured (“https” instead of “http.” The “s” means it is secure). Also, make sure the website you are on is the official website and not a fake. Do your research online and make sure you’re not falling into a scam.
For more help understanding credit, your credit report, and credit score, download ACCC’s Understanding Credit Reports handout here.