Building your credit is essential if you want to be able to take out a loan on a car or home in the future. Likely the easiest way to build credit in a short period of time is by signing up for a credit card and using it to make small monthly purchases. Despite the many benefits that come with having a credit card to your name, there are also numerous risks that you should take into account. If you happen to miss a payment or use too much of your monthly balance, your credit score could drop substantially. To that end, the following details some of the more common credit card mistakes and how to avoid them.
While there are many mistakes that can create issues with your credit score, among the most damaging problems occurs when you miss a monthly payment. In the event that the payment is more than 30 days past the original due date, your credit score can drop by anywhere from 17-83 points. For a 90-day missed payment, your score may drop by 27-133 points.
If you want to make sure that your score doesn't drop, you must pay at least the minimum balance on your credit card within 30 days after the due date. Before then, the late payment can't be recorded to credit bureaus. However, a late fee could still be assessed. The easiest way to avoid late payments is to set up the autopay feature.
When you first look into signing one or more credit cards, you may read articles stating that carrying a small balance on your credit card from month to month can actually help you increase your credit score. In fact, the opposite is true. If you carry a month-to-month balance on your credit card, your credit utilization rate will be higher.
It's recommended that your credit utilization rate is below 30% of your total credit limit if you don't want your score to drop. Keep in mind that interest will be charged on the balance that you don't pay when it's due, which will end up costing you even more money.
As mentioned above, it's best to use 30% or less of your credit card limit in a given month. If you have a credit card limit of $10,000, the purchases you make should amount to $3,000 or less. What's even more important is that you avoid using the entirety of your credit limit. Along with your credit score dropping, you may find it difficult to pay the whole bill, which could put you in even more debt. If you're able to pay off your credit card bill while also reaching the limit every month, consider asking the credit card company for a higher credit limit.
If you're thinking about applying for your first credit card, it's essential that you read through some of the pertinent card details and terms before signing up. There are numerous fees that could be assessed with your card, the primary of which include:
Each line of credit you have can increase your credit score. Your credit history is determined by your open lines of credit. In the event that you close an old credit card, your credit history will shorten, which could cause your credit score to drop. Many credit card holders make the mistake of closing cards they no longer use, which is a mistake.
Now that you have a better understanding of some of the more common credit card mistakes that you'll want to avoid, you should be able to use your card without worrying about your credit score dropping or fees being assessed.