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Depending on how you use it, a credit card can give you convenience or a curse. It could help manage your finances, get out debt faster, or earn you some nice rewards.
A credit card is a wonderful financial invention. It provides the holder with superb purchasing power, unequaled convenience, and security – bundled in a small piece of plastic. The obvious advice is to use your credit card with extreme care to keep yourself free from sizeable financial problems and protect your financial security from coming apart.
Credit card issuers make an amount of credit available for the holder to borrow from time to time. Credit cardholders, on the other hand, must comply with the terms of the credit card agreement. This normally calls for paying your credit card bills on time, keeping within your credit limit, and not using your cards to purchase illegal items or use it for fraud. Of course, you need to repay the purchases you make on the credit card but the card issuer gives you some options on how to repay the balance.
In case you want to pay your balance over a period of time, you must meet the minimum monthly amount that becomes due on a specific date each month. Otherwise, you will incur penalties for paying late. Additionally, the card companies will collect interest on the balance if you spread out your payment over time.
Any time you talk of financial matters, your credit score becomes a significant factor. However, most consumers do not bother to learn how to use their credit card wisely.
And, there are a few traps you should try to avoid. To help you keep away from them, here are some common mistakes people make that may impair their chances to get a new credit card.
1. Apply For a Lot Of Credit Cards or Loans
Why it’s bad: So, you’re shopping around for the best card for you and want to know which issuer will give you approval. Well, we say think it over before filing your application left and right. An analysis of new credit will take up 10 percent of your score and if there are multiple credit inquiries under your name, it will pull your score down.
You should be wary about sending out too many credit card applications because it may send out a couple of wrong messages.
First, the lender might think that you filed with a throng of issuers and they denied your application for some reason. Or, that you got a card from several issuers which means that you are desperately in need of credit – which is a sign of a big financial problem.
Every time you apply for credit, the prospective lender will generate a hard inquiry to see if you are creditworthy. This inquiry goes into your credit report and every hard inquiry that you get drags down your score. It may be minor, usually three to five points, but it might make the difference between getting a good score and a bad one. When you pay on time with a new card, you cancel the damage. But take note that if you apply simultaneously for several cards, lenders will consider this as a risky behavior.
What we really want to say is, apply for new cards strategically. In case a lender rejects you, find out why before you attempt to try again with a new lender. Be reasonable – a mediocre credit score getting a high-end credit card is just wishful thinking. You should settle for the card that fits your credit standing or otherwise try to improve your credit to qualify for the card that you’re aiming for.
2. High Credit Utilization
Why it’s bad: When you add a line of credit, you automatically decrease your ratio.
If you already have one or more credit cards with outstanding balances, you can help improve your credit score by adding a new card. Your credit utilization ratio accounts for 30% of your FICO score. This is the proportion of the total amount you owe compared to the credit that’s available for you. To keep your utilization ratio from increasing, you should try to keep your balances low.
Here’s the thing: once you pass the 30% mark, your scores will plunge dramatically.
3. Not Payoff Your Credit in Full
Why it’s bad: Doing this may cause the card issuer to give you a penalty APR which will burden you with considerable cost in additional interest.
You should be aware that the majority of credit cards come with a maximum credit limit. This is the highest amount that you can spend without incurring any penalty. Your card issuer does not expect you to use up your credit limit to the last cent.
When you max out your credit card, it usually shows you are using credit higher than the amount you are paying off. This situation normally ends up with you making some late payments.
Keep in mind that the card issuer will use the maximum interest they can charge you and they can reach up to 29.99%. If you max out your credit card, you open the doors to a lot of negative repercussions.
Here are some of the significant negative results:
- Your credit score will go down. We’re not talking about a few measly points here – we’re looking at a 30% drop based on the actual amount of your available credit that you are using. So, the higher you utilize your credit limit, the more your credit score will suffer.
- Your issuer can charge you a penalty APR. Although the penalty may not come automatically as soon as you max out your card, there’s a big chance that it will. Most card companies will wait until you are in default for over 60 days before they impose the penalty APR.
- You can’t use your card anymore. Obviously, when you max out your credit card, you will no longer have an available credit limit to use and therefore won’t be able to make purchases. This can put you in a tight spot if you’re depending on your card for your day-to-day purchases and have not prepared for this situation.
Avoid Maxing Out Your Card
Here are some things you can do to stop yourself from maxing out your card:
- Build an emergency fund. Set aside a specific sum in a different saving account and use it only for emergencies. When you have an emergency account, you won’t have to rely exclusively on your credit card when you have an emergency.
- Use your card only for necessities. If it’s taking you long to build an emergency fund, discipline yourself to use your credit card only in case of true exigencies and purchase only the necessities.
- Pay off your card purchases as soon as you can. This is a good habit to develop: pay off your credit card as soon as you make a purchase. Don’t wait for the statement to come – make your payment even before the cut-off date.
4. Don’t Miss Payments, But Make a Lot Of Cash Advance
Why it’s bad: Missing payments or just continuing to build up your credit card balance adversely affects your credit report and your credit scores as well. Banks and lenders are not usually fond of borrowers with a high amount of credit card debt.
In the financial realm, every decision will have a material effect on your credit score. Your credit is score is very important because should you experience a downside to your financial situation, your score could save you financially. A credit card cash advance may seem inviting and convenient in case of an emergency when you need cash real fast. But remember that it can be very expensive, so use this feature as your last card.
Some people will say that taking a cash advance from your credit card is tantamount to taking a loan such that it will pull your credit score down. The truth is, when you take out a cash advance through your credit card, the card issuers won’t repost this at all to the credit-reporting agencies.
Although in some situations, a cash advance can hurt your credit score, but if you can deal with them accordingly, you’ll negate any effect. What is important is to realize that cash advances cost a lot – higher interest rates plus additional fees. This can jack up your outstanding balance faster and make it harder for you to keep up with your monthly payments.
In addition, card issuers normally look at people who take out a high amount of cash advances as probable candidates for default.
What you can do is avoid making a cash advance altogether and try instead to get a small loan from your local financial institutions.
5. Cancel Other Cards
Why it’s bad: When you cancel accounts in good standing with other companies, you effectively shorten your length of credit history on your report and it’s worth 15% of your score. You will also reduce your total available credit, which would likely increase your debt utilization ratio in case you have high outstanding balances on other credit cards.
Many people often close out the cards they no longer use to lessen the number of cards in their wallet. What they don’t realize is that it can pull down their credit score. Your debt utilization ratio goes up when you close your inactive accounts.
A simple trick is to make a small purchase using the card you don’t use much and then pay it off immediately. This little activity could be enough to register in the card issuer’s system to keep them from automatically closing your account and damaging your credit score.
But if the card that you don’t use often charges you an annual fee or you really want to simplify your card holdings, go on and close it. Just remember to time it well – it’s not wise to close several cards at the same time.
6. Mortgage Payments
Why it’s bad: It’s really very simple. You’re already paying interest on your mortgage, so why would you want to pay additional interest on it through your credit card? It’s a very expensive option that you should avoid. If you use your card this way, you would also increase your credit utilization rate which could, in turn, lower your credit score. It’s just unwise to do this for the entire term of your mortgage which typically is from 15 to 30 years, depending on your contract.
Most of the time, this is not a viable option. This is because mortgage companies don’t encourage borrowers to pay their mortgage through credit cards. In reality, there will be a third-party company who will have to act as a go-between to allow you to pay the mortgage installments through your card. However, that will cause you to pay much more because these third-party services cost an arm and a leg.
In the event that you are able to pay your mortgage with your high limit credit card, you’ll be paying a higher interest rate at the end of each month. Things could become chaotic if you fail to pay down your entire account balance at any time. If ever you find a legitimate way to pay your mortgage with your credit card, it’s still not a good decision if you’re not planning to pay off your total credit card balance every month.
When consolidating credit card debt with a mortgage, you’ll end up with a credit card bill for the whole term of the mortgage and we’re talking about years. In case you find it difficult to pay your mortgage installment for one particular month, try to get a grace period from your lender. You can also try other loan options such as a personal loan or refinance your house.
There is no other financial strategy that could prepare you for a safe future other than avoiding the debt trap totally. Sadly, many people put their financial situation at risk by racking up credit card debts left and right. If you have the discipline to use your credit cards wisely, you can benefit a lot from them. It can take time but it helps you build your credit and get some protection for online purchases. It’s also very convenient when you need to purchase high ticket items because you won’t have to carry all that cash. But when you’re careless with them, they can end up as usurious loans rather than what they should be: a useful substitute for cash.
And when your credit card debt builds up, it will become extremely challenging. Try not to get to this point by using your card conscientiously and only for emergencies. Remember to buy with the credit card only the things you can afford to pay in cash. Pay your credit card bills when they become due.
What we’re saying is, credit cards can be highly advantageous for you to build up your credit. They show to your future lenders that you are a responsible and creditworthy borrower. But always remember that having a credit card is a big responsibility and one that you must take unconditionally with all sincerity.