Credit cards, it seems, can trip us all up in a variety of different ways. Not only does the sheer number of different cards, each with slightly different attributes and intended for use by a slightly different type of consumer, make selecting the right one difficult, but the changing regulations and uncertain economic climate can also make proper usage tricky. The goal, obviously, is limiting your mistakes (especially the big ones) in order to attain and maintain a good credit score, maximize your spending power and make your money go as far as possible. To that end, we have compiled the following list of some of the biggest (and most easily avoidable) mistakes consumers consistently make. So steer clear and enjoy!
1. Not Building Credit ASAP
It’s extremely important to have an extensive record of responsible credit use IN YOUR OWN NAME. After all, future creditors, lenders, employers and landlords will want proof that you (and not your husband, wife or parents) can effectively handle money. If that proof is nowhere to be found, you’ll be considered a risk, plain and simple. And while you may feel comfortable simply being an authorized user on a credit card account or doing without credit at all, having your own credit card—whether you use it or simply lock it away in a drawer—is the most efficient means of adding positive information to your major credit reports and thereby building a solid credit score. So, regardless of your exact situation, make sure to open a credit card (secured credit cards offer guaranteed approval) and use it responsibly, because young people just beginning financial independence aren’t the only ones who find themselves with insufficient credit.
2. Applying for a Card Above Your Credit Grade
You must also keep in mind that credit building is a process, and it’s important that you do not get ahead of yourself and apply for a credit card that your credit score won’t allow you to get. Not only will your application obviously be turned down, delaying your credit building efforts, but you will also be forced to apply again, and multiple hard inquiries on your major credit reports within a short time frame signals desperation to credit scoring agencies and may result in temporary credit score damage. So either order your FICO score, the most commonly used credit score in the U.S., or perform a free credit check to get a sense of where you stand. Then, no matter how few credit card options there are available to people at your credit level or just how attractive cards for people with better credit might seem, you must remain disciplined.
3. Mishandling Rewards
At some point in any discussion of credit card mistakes, rewards will be mentioned—it’s inevitable. The potential and surface attractiveness of rewards simply blind many consumers, causing them to strive for free flights, hotel stays, extra cash and the like when no annual fee credit cards, balance transfer credit cards and 0% credit cards might not only serve their needs better, but also prove more lucrative. As a general rule, you should only focus on maximizing your credit card rewards if you have at least good credit and pay your bill in full every single month. Otherwise, look for the card that will allow you to cost-effectively build credit or lower the cost of debt, present or future. If it happens to have rewards too, consider yourself lucky.
4. Intentionally Leaving a Balance
For some reason it has gotten into the heads of some consumers that intentionally leaving a small unpaid balance on their credit card accounts each month is somehow good for their credit scores. Perhaps they think it will gain them preferential treatment from their credit card companies, given that their balances lead to interest revenue, but whatever the case, it’s ill-advised. The only thing a balance will do if left unpaid is incur interest and cost you money, so avoid this curious practice.
5. Thinking Limitless Describes a Credit Card
Sorry to break the news, but ALL credit cards have spending limits. While credit card companies try to position No Preset Spending Limit (NPSL) cards as being unlimited and many of us want to believe that it’s true, these cards have limits that keep changing without being communicated to cardholders. This secrecy can lead to cards being declined out of the blue and credit scores falling as a result of misleading credit utilization. Therefore, unless you have a good reason for getting a particular NPSL credit card, the uncertainty such cards foster make avoiding them a good idea.
This article comes from Card Hub’s editorial department. Card Hub is a leading online credit card, gift card and prepaid card marketplace.