As of April 2015, Americans had racked up $900 billion in revolving debt. While that is less than the $916 billion in 2009, consumers will not be putting away the plastic any time soon. Credit cards, when used wisely, can help save money and improve your credit score. This is vital for obtaining the best interest rate and for qualifying for loans. However, buying things with a credit card can be a financial disaster if you’re not careful.
Mistakes to Avoid When Using a Credit Card
- Late payments or no payments.If you don’t keep track of your bills, its easy to forget or miss a payment. You may think that paying a credit card late or skipping the payment isn’t a big deal, but you could seriously damage your credit score when you don’t pay on time. About 35% of your FICO score is based on your payment history.
- Maxing your cards and paying the minimum only. Card utilization ratio is another factor into calculating your credit score. This is the amount of credit card debt you have compared to your total credit line. Lenders prefer you to use 30% or less of your total available credit. Maxing out your card can also hurt your credit score. The total amount owed accounts for 30% of your FICO score. One of the biggest allures to having a credit card is making payments on things, rather than buying outright. While paying the minimum seems manageable, your balance will continue to creep up. Your monthly payments will continue to increase. The debt continues to increase and eventually you have a pile of debt and you can’t afford the payment anymore.
- Taking out cash advances. When short on money, taking a cash advance may seem like a good idea. However, its a temporary fix. The advance may allow you to cover the gap you run into, but borrowing against your credit line typically comes at a high cost. You not only have to pay interest on the transaction,, but you likely will have a fee.