Top Ten Credit Card Mistakes

Nana didn’t believe in credit. In her eyes, if you couldn’t afford to pay for it before you took it home, then you shouldn’t have it. And in Nana’s world, that worked just fine. Nana’s world was a world where bankers decided on loans based on ‘feel’, and credit was something you got from your local shopkeeper because he ‘knows where you live’.

The credit world is far more complicated today. Nana, who never owed anyone a cent in her life that she didn’t repay at the first possible opportunity would be a poor credit risk in the eyes of a credit card company or bank. Having a credit card isn’t just a status symbol any longer, it’s a necessity for a lot of people. Many stores require a picture ID AND a major credit card as proof of identity before they’ll accept your check. And if you don’t have an established credit history, you may not be able to get credit when you NEED it.

Credit cards are the easiest means to establish a credit history for most people. Unfortunately, they’re also the easiest way for most people to get seriously into debt that they can’t dig themselves out of. The same instrument that can help your credit rating can harm it in ways that you don’t expect. Here’s a list of the top ten credit card mistakes people make that hurt their credit rating.

Not having any credit cards at all.
Unless you’ve established credit some other way (with a co-signed loan for a car, perhaps?), no credit cards often means no credit history. Your credit history is what lenders look at when deciding to lend you money.

Applying for every credit card offer that comes their way.
One of the things that creditors check is how many credit applications you’ve made in the past 3-6 months. If you’ve applied for many, they may decide that you’re a poor risk because you’re shopping for credit. That may mean that you’ll be running those cards up to their limits and overextending yourself.

Habitually making payments late.
Credit card companies report late payments to the credit reporting agencies. Even one or two payments that are 60 days late can affect your credit rating for years.

Having too many credit cards.
Someone once joked ‘You can never have too many credit cards.’ Unfortunately, it’s not true. Some lenders consider your total available credit when deciding whether to lend you money. While most consider how much debt you carry against the total amount available, not all do. For some, if you have that much credit available, you’re at risk of running up that much debt.

Carrying too much of a balance on your credit cards.
Generally, lenders look at the ratio between your available credit and your credit debt. The lower that ratio, the more favorably it will affect your score. If you have $5,000 available to you in credit on various credit but your combined balances are $900, then your credit utilization ratio is 18% - which most lenders will find very appealing.

Canceling unused credit cards to bring their credit score up.
In a nutshell, don’t. Most lenders look at your credit-to-debt ratio to help them determine your credit score. If you have a total $5,000 available credit on six different credit cards, and $900 debt - all on one card, your ratio is 18%. If you decide to cancel the other five cards that you don’t use, leaving yourself with $1500 available credit and $900 debt, your ratio jumps to 60% - even though you don’t owe a penny more.

Paying the minimum payment on all your credit cards.
Paying the minimum on your credit cards is a sure way to stay in debt forever. Instead paying the minimum on your credit cards, pay as much as you can afford each month. You’ll pay less in interest and clear up your debts faster – which is great for your credit score.

Taking a cash advance on one card to make payments on another.
Except in some very specific circumstances, using one credit card to pay another is not a good idea. All it does is shift your debt around – and incurs a higher fee on the card which funded the cash advance. About the only time that it’s recommended is if the advance will pay off the other credit card IN FULL and shift the balance to a card with a far better interest rate.

Lending your credit card to someone.
No matter how well-intentioned or how much you trust another, lending your credit card to someone is a risk you just shouldn’t take. You are the only one responsible for the debts charged to it. Lending your credit card to someone puts you at serious risk for their financial mistakes.

Using credit cards to live beyond your means.
Credit cards tempt you to live beyond your means – to purchase things that you can’t afford. Consider purchases seriously. If you’re regularly running up even $50 a month in ‘living expenses’ that you can’t pay off the following month, then you should take a serious look at your spending habits.