Credit cards are one of the most widely used — and abused — financial tools in the U.S. Among households with credit card debt, the average balance they’re carrying is more than $15,600, according to Nerdwallet, a figure that has barely budged since the recession.
The troubling part is that many Americans know very little about credit at all. A survey by the Consumer Federation of America found that 40% of Americans had no idea that their credit history played a role in determining whether they could qualify for new credit. And one in four consumers admitted they didn’t know how to effectively improve their credit scores. Millennials are so spooked by credit debt that a whopping 63% say they don’t carry a credit card at all, Bankrate found.
When used properly, credit can be a powerful tool to build up your finances. Here are a few ways you may be using plastic the wrong way:
1. You’re opening too many credit cards at once. While it’s true that high lines of available credit can help improve your credit score, opening too many credit cards at one time can negatively impact you as well. Every time you apply for a new credit card, a “hard inquiry” note goes on your credit report. Having too many cards can also make it more difficult to keep track of your balances, leading to overspending and forgotten payments. How many is too many? It depends. Having 25 credit cards won’t necessarily hurt your score all that much — what really matters is whether those 25 credit cards have revolving balances. If you can keep your credit balances low and pay off your cards each month, you should have no worries. But if you’re feeling overwhelmed by the number of billing statements you get, chances are you’re juggling too many.
2. You’re paying the minimum balance each month. Carrying a revolving balance on credit cards is a surefire way to hurt your credit score — credit balances make up 30% of your FICO score, the most widely used credit score in the U.S. Paying off your credit cards in full each month is the best way to improve your score because it lowers your credit utilization rate — the amount of debt you’re carrying compared to your total credit limits. For example, if you have a $600 balance on a credit card with a $10,000 limit, your utilization rate is 6%. Experts recommend keeping your utilization rate at 30% or less, but ideally it would be under 10% (or, even better, 0%). If you find yourself only able to afford minimum payments on your cards each month, it’s time to adjust your spending.
3. You’re paying off cards with low interest rates first. When paying off multiple credit cards, you can simplify your strategy by focusing on the cards with the highest interest rates first. They will cost you more in the long run, so the quicker you can pay them off, the more money you’ll save. If you want to calculate how long it will take you to pay off a credit card, use this calculator from Bankrate.
4. You’re using them for discounts. Retailers like Gap, Ann Taylor and Home Depot offer sweet one-time discounts to customers who open up a new line of credit at their store. Sure, that 10% or 15% off may sound like a good deal, but when you consider the fact that store cards tend to have interest rates exceeding 20%, you could end up negating those savings in the long run. If you want to responsibly use a store credit card, make sure to spend only what you can afford to pay off — in full — at the end of the billing cycle.
5. You’re ignoring your bills. Past due balances can destroy your credit score, making it harder for you to get access to new credit, and even potentially hurt your chances of getting a job. Payment history is the single largest factor credit reporting agencies use to calculate your credit score. If you can’t afford a bill payment, contact your lender to ask if they will offer you any kind of grace period. If you just ignore them, your card issuer will wind up reporting your missed payments to credit bureaus. Those red marks will remain on your credit report for up to seven years.
6. You aren’t monitoring your credit report. Identity theft is the fastest-growing reported crime in the U.S. To ensure your accounts haven’t been compromised -- and no one has got their hands on your credit card number -- keep an eye on any unusual activity by tracking them online. Sign up for sites like CreditKarma or Credit.com, which both offer free credit tracking. Then ask your bank or credit card company to alert you anytime you make a large purchase (you pick the amount). As always, check your credit reports for free once a year at annualcreditreport.com.
7. You’re closing old accounts. When you’re trying to build your credit history or improve your credit score, one of the worst things you can do is close old accounts. You may think you’re simplifying matters by getting rid of credit cards you never use, but that old credit history is actually good for your score. Length of credit history makes up 15% of your overall score, according to FICO. However, if you’re paying a high annual fee for a credit card you no longer use, it may be worth it to close that account.
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