At a Glance
Just like a celebrity making a terrible fashion faux pas on the red carpet (we’re looking at you Katie Holmes at The Jingle Ball), even the most well-intentioned credit card borrowers can accidentally harm their credit with simple mistakes. There are seemingly small credit mistakes you can make that can have a direct or significant impact on your credit score, and this can have an impact beyond just getting approved for additional credit. Read on to learn more about the top credit mistakes, and tips for how to avoid them.
1. Choosing a card that doesn’t suit you
The mistake: Not all credit cards are the same, from rewards and perks and benefits to interest rates and terms. It’s possible to choose a credit card that earns rewards that you won’t use, or one that has a variety of perks and benefits that you don’t take advantage of. Rewards structures can be simple but they can also be complex, which can make taking advantage of the programs difficult. Plus, with so many options, it’s easy to just choose one without researching to make sure it fits your lifestyle.
The fix: The key is to research your options carefully. For example, if you don’t have any credit, you may want to consider a student credit card. Or, if you have poor credit, a secured credit card can be an option. You may want to choose a card with cash-back rewards, or one that earns you points or miles to put toward travel purchases. Some cards have flat rewards rates while others offer higher rates in certain bonus categories. Many travel cards charge annual fees but also have a variety of luxury travel perks you can take advantage of.
Ultimately, make sure you know why you’re getting a card and take your research seriously.
2. Applying for multiple credit cards together
The mistake: It’s not bad to have multiple credit cards if you’re using them responsibly and repaying them in full each month. However, each time you apply for a card, the issuer runs a hard credit inquiry to check your credit report. Having only one credit inquiry hurts your score by a few points, but multiple inquiries in a short period can have a compounding effect, causing issuers to view you as a riskier borrower.
The fix: First, do your research before applying for a card to make sure you meet the requirements. Only apply for a card that you’re likely to be approved for so you don’t have to submit multiple applications.
If you want to have more than one card to take advantage of rewards, spread out the applications over a longer period to give your score time to rebound.
Learn more: Do More Credit Cards Help Your Credit Score?
3. Not knowing your credit card terms
The mistake: Credit card terms and conditions aren’t exactly a fun and exciting read, but if you don’t take the time to understand them you could be hit with unexpected fees. You could also miss important rules and restrictions regarding the card’s rewards program and other benefits.
The fix: Take time to read the fine print on your statement to learn more about introductory rates, balance transfer fees, annual fees, penalty APR, late payment fees, and other charges you should know about. Terms will also outline information about the card’s rewards program, such as how much you can earn, how you can redeem rewards, and other restrictions, and about other benefits the card may offer.
4. Not paying your bills on time
The mistake: This is one of the second biggest mistakes you can make because your payment history makes up 30% of your credit score. Missing even one payment can have a huge effect on your score, though late payments are only reported if you’re late by 30 days or more.
If you do have a late payment, it will remain on your credit report for seven years, which can keep your score from rebounding for a longer period.
The fix: Request payment reminders from your lenders, most of which are provided via email, text, or push notification. Or, set up autopay through your lender or bank account so that payments are made automatically and you’ll never miss one. (If you do this, make sure you have enough money in your account to cover your bills.)
5. Paying only the minimum amount
The mistake: Paying only the minimum amount on your credit card each month means you’re also carrying a balance from month to month. Not only will you be charged interest on that balance, owing more money in the long term, it can also damage your credit.
The balance you carry each month may be high, which increases your credit utilization ratio. The total amount of your debt also plays a role in your credit score, so having a high balance and a high rate can both damage your score.
The fix: Try to pay off your cards in full each month. If that’s not possible, pay as much as you can. It’s important to keep your credit utilization ratio below 30%, but if you have a large amount of debt that feels out of control, consider using the debt snowball method or avalanche method to pay down the balances.
6. Maxing out your credit card
The mistake: Even though you have access to a certain amount of credit, that doesn’t mean you should use all of it. Doing so can negatively affect your credit score even if you pay off the whole balance each month.
The reason is that the date your balance is reported to the credit bureaus and the date your monthly payment is due is different, so even if you plan to pay off the card, the credit bureaus will see a high credit utilization ratio and deem you at risk.
The fix: The easiest fix is to ask your credit issuer when balances are reported to the credit bureaus. Then, pay off your balance a few days before that so that your utilization rate is low when it’s reported. Or, consider making a payment on your card every two weeks to keep your balance low throughout the entire billing cycle.
7. Asking for a credit limit increase
The mistake: One of the most important factor of your credit score is your credit utilization ratio, or how much debt you carry compared to how much you can borrow. If you have a high credit utilization rate, it may seem like a good idea to ask for a credit limit increase so you can have access to more funds.
However, when you do this, the bank or issuer will need to check your current financial situation and credit, which will trigger a hard credit inquiry and decrease your score by a few points.
The fix: First, ask your lender or issuer how they treat a request for a credit limit increase. If you have an existing relationship with them, ask if they can grant an increase without pulling your credit. Additionally, showing financial borrowing and spending habits can trigger an automatic increase.
8. Overspending on your credit card
The mistake: Overall, having a large amount of debt (especially when unnecessary) can make it more challenging for you to make monthly payments, increasing the likelihood that you’ll miss a payment. It can also increase your credit utilization rate. Plus, if you don’t pay it off completely each billing cycle, outstanding balances will start to accrue interest.
It’s easy to lose track of credit card spending since you aren’t seeing or feeling the money immediately leave your bank account. It’s also easy to want to spend more to rack up credit card rewards. While you have a credit limit on your card and technically you can spend up to that amount, doing so can be more costly in the end.
The fix: Only use your card for purchases that you can pay off each month. Make sure you have a plan for paying off your card each billing statement. If you do need to make a large purchase, consider getting a credit card with a 0% intro APR period so you won’t accrue any interest on the balance during that time.
9. Not monitoring transactions
The mistake: It can be tedious to review every charge on your credit card, especially if you use it frequently. However, not doing so can make it easier for fraudsters to steal your card information and use it to make fraudulent purchases, which can be very expensive for you to ignore.
The fix: Make it a habit to regularly check your credit card activity online or by reviewing your billing statement. If you see a charge you haven’t made, this can be a sign of fraudulent activity. If you notice any questionable charges, contact your credit card company immediately. You can also set up alerts so that any time your card is used to make a purchase, you can get a notification so you can keep an eye on usage.
10. Closing credit card accounts
The mistake: If you no longer use a credit card, or you’ve completely paid it off and no longer want the temptation of using it, you may consider closing the account. Unfortunately, this can hurt your credit score. Not only does it reduce the amount of credit you have available, but if you have a balance on other cards or debt, your credit utilization will then increase. It’s important to keep your utilization ratio as far below 30% as possible.
Additionally, if that credit card was open for longer than the rest of your accounts, you could decrease the age of your credit history. Plus, you no longer have the benefit of on-time payments, which help your score.
Even if you close an account in good standing, it can remain on your credit report for up to 10 years.
The fix: In many cases, it may be smarter and make more sense to keep the account active but to cut up and throw away the physical card. Or, use the card for one or two small purchases per month, such as using it to pay your utility bill, and then pay it off in full each month. This will help improve your payment history.
Making a late payment or missing a payment completely can have the biggest negative impact on your credit, though it’s only reported if you’re more than 30 days late. Your score could drop up to 100 points or more depending on how late you are.
Building credit takes time, but there are a few things you can do to make it go faster. First, make sure you’re paying all your bills on time. Consider adding to your credit mix or asking for higher credit limits, both of which can have long-term positive impact. Use a secured credit card, and get credit for rent and utility payments. Finally, review your credit report and dispute any errors or mistakes.
While there’s quite a list of things that do affect your credit, there are also a few things that don’t including: Using a debit card, getting married or divorced, having a credit application denied, getting help from a credit counselor, or a decrease in your salary.