For those of us who use credit cards responsibly, there are lots of benefits to be had. Credit cards offer security and convenience that cash does not. But when you don’t use credit cards responsibly, you can rack up fees and easily damage your credit scores.
Credit card debt is one of the biggest sources of consumer debt in America. Here are some mistakes you may be making with your credit card.
1. Going Into Debt to Get Rewards
Credit card companies know what they’re doing when they offer enticing sign-up bonus offers and cash-back rewards. Although it might be a good idea to take advantage of these special offers, you should think long and hard about putting yourself in debt in order to fulfill the promotions.
Just because you’re getting 5% cash back on electronics this month doesn’t mean you should buy a computer you don’t need to get the rewards. Not only are there usually caps on how much cash you can earn, but if you charge too much and can’t pay off the balance in full, you’ll be paying interest on those charges. That interest may wipe out all of the rewards you may have earned.
This doesn’t mean you shouldn’t try to earn rewards, just make sure you’re doing the math and making the rewards worth your while.
One reason the credit card industry is lucrative is that so many people get into credit card debt and can afford to make only minimum monthly payments. Meanwhile, your balance continues to grow and eventually you have to pay back the original amount borrowed plus interest.
Instead, think of your credit card more like a debit card directly linked to your bank account. Just because you have a $5,000 credit limit doesn’t mean you should reach it. (In fact, doing go can really hurt your credit.) Don’t spend more than you can afford to pay off. That way, you won’t have to pay late fees or interest.
3. Closing a Credit Card
Closing a credit card can have a major negative impact on your credit scores. One of the major components of your credit score is the age of all your accounts. The higher the average age, the better it is for your credit score. A long relationship with a credit card company tells lenders that you have been borrowing money and repaying consistently over the years. Canceling an old card might seem like a good idea, but it could “age off” of your credit report faster (generally 10 years from when it was closed), meaning you not only lose the age of that account, but also that positive payment history. Another major factor of your credit score is your utilization rate (your current debt to available credit). If you close a credit card you’re not using, you lose that available credit, which can hurt the utilization rate and lower your score inadvertently. The free Credit Report Card gives you a letter grade on important credit scoring factors like your credit age and amount of debt, if you want to see how your credit stacks up.
As long as there’s no annual fee, consider keeping your oldest cards open. You may want to make a purchase every six months or so in order to avoid having your account closed due to inactivity.