8 Credit Card Mistakes That Will Tank Your Credit
Credit cards are a convenient and useful financial tool. They’re also a smart way to build a strong credit history and boost your credit score.
But only if used responsibly.
For all the perks that credit cards offer, they can also lead to overspending and missed payments. And while responsible use will give your credit score a boost, irresponsible use will send it in the other direction.
Ready to make credit cards work in your favor? Here are eight credit card mistakes that can negatively impact your credit score — and expert-approved tips on how to avoid them.
No. 1: Maxing out your credit limit
Your credit utilization rate is one factor that can affect your credit score. It’s usually expressed as a percentage and is based on how much of your available credit you’re using. For instance, if the combined credit limit on all of your credit cards is $10,000 and you have $4,000 of debt, your credit utilization ratio is 40%.
Using most or all of your available credit isn’t ideal, because it increases the utilization rate. Unless you have the available funds to pay off a balance in full, the best way to avoid a high rate is to avoid maxing out credit cards. In fact, experts typically recommend staying below 30%, but lower can be better for your score.
“Use your credit card for groceries and small expense accounts like your cell phone and subscription [accounts], like Netflix or Hulu,” suggested Devon Horace, the founder of Horace Consulting, LLC. “If you pay on small accounts, then you can better control your credit card utilization rate.”
No. 2: Missing payments
Payment history is another important factor in determining credit score. Consistent missed or late payments can take a toll.
If your payment is a few days past due, you will likely incur fees and penalties. Once payment is 30 days past due, most lenders will report it to the credit bureaus.
To avoid missing your payment, consider setting up autopay. This will help ensure payments are made on time. If autopay isn’t for you, try manual reminders, such as calendar, email, or text reminders.
Life happens — but don’t ignore missed payments. Take swift action. Pay the past-due amount, if possible. If not, consider calling the card issuer to negotiate a payment or discuss repayment options.
No. 3: Making only minimum payments
The general rule of thumb for credit cards is to make at least the minimum payment — this will keep your account from becoming delinquent. But leaving a balance will rack up interest charges, and is best avoided if possible.
Before financing a large expense, create a payment plan. Make the largest payment you can afford within your budget. Continue to make consistent, on-time payments above the minimum. This will help you pay off the balance faster and avoid interest charges.
No. 4: Neglecting your statement
When was the last time you checked your credit card statement? A statement is a summary of your activity within a billing period. But are all those charges actually yours?
A good habit to get into is to regularly review your credit card statement. It’s one of the best preventative measures to avoid fraudulent charges, unauthorized charges, and reporting errors.
If you notice a suspect charge, contact your card issuer immediately. Use the contact information located on your billing statement or the issuer’s verified website. Report all discrepancies, no matter the amount.
No. 5: Ignoring fees
Don’t overlook fees and penalties associated with a credit card. Credit card issuers set their own fee structures — and not all issuers include all types of fees. These might include:
- Annual fees
- Late fees
- Returned payment fees
- Cash advance fees
- Balance transfer fees
- Foreign transaction fees
- Card replacement fees
You’re responsible for the fees associated with your credit card. Be sure you’re aware of the fee structure and can reasonably pay all fees necessary to maintain your account. For instance, an annual fee may be required to keep an account in good standing. If you can’t afford it, a closed account can negatively impact your credit, so think twice before opening a new account.
No. 6: Relying on balance transfers
A balance transfer is a credit card transaction in which debt is moved from one account to another — preferably a new one with a lower interest rate.
Transferring a balance doesn’t directly impact your credit, but opening a balance transfer card does. Consequences can include a temporary hard inquiry during the application process and a shortened credit history, if approved.
Balance transfers are a smart option if you are able to pay off or greatly reduce the balance during an introductory period — saving money on interest.
Carefully weigh the pros and cons of this credit card debt-reduction method. If you can’t reduce your debt within the introductory period, you must pay the interest rate and fees associated with the new card.
“Some cards will allow you 12 months or even 18 months to pay it off with 0% interest,” said Karen Ford, a financial coach. “If you don’t pay it off within that time frame, all that interest is added [to the balance] and you have to pay it,” she warned.
No. 7: Applying for credit too often
Interested in opening a new credit card? Hold on. Applying for — and opening — credit can cause a temporary dip in your score.
When you apply for a credit card, you receive a hard inquiry on your report. A hard inquiry leaves a negative ding on a credit report.
To apply for credit, typically you submit an application that authorizes a lender to run a credit check. This is done before a line of credit is extended to the borrower. But don’t worry — after two years a hard inquiry will fall off the report.
The main caveat is that you shouldn’t rack up too many hard inquiries at once. Generally, the more inquiries within a short period of time, the more negative dings, and the riskier you appear to lenders.
To avoid this, apply for credit as needed, and not all at once. Wait between each credit card application. Carefully consider your approval odds when applying for new credit.
Also consider the credit card application within the large context of your finances. This is one way to avoid a potential negative ding on your credit report before an upcoming financial decision.
For instance, if you’re “getting ready to make a large purchase, such as a house, don’t apply for any other loans until that house is closed,” Ford suggested.
No. 8: Closing a credit card account
The average length of time you’ve held a credit card is one factor impacting your credit score — whether a few months or a few years.
When you close a credit card, the average length of your credit history is impacted. It also reduces the available credit and subsequently increases the card utilization rate, especially if open accounts have a high balance.
Credit history length can be impacted by the following actions:
- Delaying opening your first credit card
- Opening a new credit card account
- Closing an old credit card account
If you want to cancel a credit card, consider the pros and cons before making a decision that might impact your credit.
Credit cards are a convenient and useful financial tool, but mismanagement can negatively impact creditworthiness and your overall financial situation. As with all financial products, remain vigilant to avoid missteps.
Karen Ford is a master financial coach, public speaker, entrepreneur, and author at KarenFord.org. She has coached people with a variety of money issues, from just US$500 in debt to $800,000 in debt. She has coached folks with up to 86 credit cards and taught them how to pay down and pay off those credit cards in record time.
Devon Horace is an investor, personal finance, and business strategist, and founder of Horace Consulting, LLC. From $47,238.38 in debt to millionaire, Horace now helps other young professionals achieve their personal finance and business goals through Horace Consulting, LLC. His goal is to increase financial and business literacy in his community.