12 Common Mistakes to Avoid Opening Credit Cards
Having a credit card comes with many benefits. It allows you to make payments using a line of credit while building your credit history. Also, many credit cards come with cashback, travel perks, and other rewards. But making mistakes in handling your credit cards does more harm than good to your credit history. Therefore, you need to know about them so that, by avoiding them, you can use your cards correctly and profitably.
#1. Applying for Too Many Credit Cards
It is not good to apply for too many credit cards in a short time, for instance, within one or two weeks. This practice is a big mistake to avoid. Your credit score can be negatively affected by such behaviour. How? Whenever you authorise lenders to check your credit history for each new card application, they will do a thorough enquiry on your report. If they find that you frequently apply for credit cards, they may conclude that you are insolvent or bankrupt. And this will reduce your credit score by 5 or 10 points. Therefore, we suggest that you do not apply for a new credit card until about six months after your last application.
#2. Paying Your Credit Card Bill Late
No matter how busy you are, opening a credit card requires you to keep certain dates in mind, such as when to pay your credit card bill. It is important to try not to make the mistake of paying your bill after the expected date. About 35–40% of your overall credit score depends on your payment history. This score is based on the FICO and VantageScore assessment models used by popular credit bureaus in the United States and the United Kingdom, which are Equifax, Experian, and TransUnion. Your payment history is the most important factor that they use to calculate your credit score, and when you miss one payment, it could have a negative impact on your record.
When lenders are considering your application for a new credit card, they place more focus on your payment history. Why? They do not want to give credit to someone who does not make timely payments. So, always try to pay your credit card bills in time. You can download any free reminder app on your mobile phone and use it to stay prompt.
#3. Making Only the Minimum Payment on Your Credit Card
The lowest amount of money you can pay towards your credit card bill in a month is known as the minimum payment. It could be 2–4% of your credit balance or a flat fee. Whatever the case may be, making only the minimum payment on your credit card is not a good practice. Although this mistake is not as bad as paying your credit card bill late, it could still build a high interest on your credit and make it more difficult for you to pay off your balance. Therefore, ensure to make more than the minimum payment on your credit card each month.
#4. Going on a Spending Spree
It is a mistake to think that having a credit card gives you the freedom to make as many purchases as you wish. Going on a spending spree is a major no-no! You must not forget that every euro or dollar you spend from your credit card must be paid back. Therefore, you should use your card to make only the necessary expenses or payments.
#5. Keeping a High Balance on Your Credit Card
Another common mistake people make is keeping a high balance on their credit cards. This behaviour is also known as “maxing out” your credit cards. It is closely related to going on a spending spree, which we talked about previously. Yes, your credit card company permits you to spend up to a certain amount of money (maximum spending limit), but that does not mean that you should max out your credit card. The reason is that a high credit balance might be difficult for you to pay back. Besides, you may end up paying interest charges, which are extra costs on your purchases. So, spend only what you could afford if you had cash with you, not borrowed money.
#6. Taking Out a Cash Advance on Your Credit Card
The most expensive payment method is using your credit card to withdraw a cash advance. It is a big mistake—one you should avoid. Getting cash advances with credit cards comes with very high-interest rates. Besides, many cards will charge up to a 5% transaction fee. Instead of incurring more costs in fees by taking out a cash advance on your credit card, it is better to go for a low-interest personal loan, download a budgeting app, get a prepaid card, or start a side hustle for good cash management. Any of these options will help you to avoid using your credit card for expenses that are not urgent or, perhaps, not significant.
#7. Chasing Credit Card Rewards
If you choose and use your credit cards wisely, you can get several financial rewards, which include cashback and other perks. However, it is not good to allow your spending decisions to be driven by your desire for financial rewards. Using your credit card to buy things carelessly because you want to receive some rewards is a mistake. Avoid it! Some credit cards with very attractive rewards charge high fees and interest while tempting you to spend beyond what you can afford. And if you do not have a good plan for paying your balances, cards like these will be difficult for you to manage.
Your choice of a credit card should be guided by your lifestyle and your financial goals. If you are a frequent traveller, get a card that rewards you for your travel expenses. Likewise, get a credit card that gives you cashback for your spending at grocery stores if you often spend on food items and other similar things. Besides, if you are a cryptocurrency holder, you could use a crypto credit card that offers generous rewards for free or at low fees.
#8. Not Paying Off Big Purchases During a 0% APR Period
The term “APR'' stands for annual percentage rate. It is the annual interest rate on a loan. Zero-interest credit cards, also known as 0% intro APR credit cards, allow cardholders to make payments with borrowed funds while incurring no interest for a set period of time. The interest-free duration might range from 6 to 18 months. This kind of credit card is often offered to encourage account opening.
Meanwhile, you should continue to pay your monthly no-interest balance. As an illustration, assuming you use a credit card with a 0% APR for 12 months to purchase a €300 television, you need to make €25 monthly payments. In that way, you will pay off your debt before the expiration of the no-interest period.
Also, you need to be careful to remember the expiration date for the promotion. Otherwise, you might end up paying a very high APR on big purchases you make after the 0% offer has elapsed. It is a mistake not to pay off big purchases while in a 0% APR period.
#9. Not Checking Your Credit Card Billing Statements Often
While spending as little as €30 here and there, you might think that your expenses are low. But such small payments could gradually add up to a large amount. Hence, not checking your credit card billing statement frequently is one of the mistakes you should avoid. Keep in mind that having high balances can result in higher interest rates and a decrease in your credit score as your credit usage ratio increases. Furthermore, if you are not keeping track of your expenditures, how else will you know the amount you have charged?
#10. Losing Your Credit Card (and Not Reporting It)
One of the mistakes novice credit card users make is that they are not careful enough with their cards. During in-person shopping, they could forget their credit cards in the store or misplace them along the way. Therefore, whether you are a new or experienced card user, try not to mistakenly lose your credit card. A fraudulent person might get their hands on it and spend your credit card to the limit. Therefore, if you lose it, quickly report the situation to your credit card company to avoid paying for the charges on the stolen card.
#11. Cancelling Your Credit Cards
Do not cancel your account, even if your credit card balance has been reduced. Your credit score would be impacted by closing your account if you have a long credit history and a low credit utilisation rate. Keep in mind that the percentage of your total available credit lines across all cards that you are currently using is known as your credit utilisation ratio.
In addition, your credit history will be shortened if you cancel older credit cards, which will cause a considerable reduction in your credit score. To preserve your credit utilisation ratio and avoid any harm to your credit score, it is advisable to keep the oldest account active as well as the one with the largest credit limit if you do decide to cancel some of your credit cards.
#12. Not Understanding Your Credit Score
A major reason for using a credit card is to build a good credit history. However, a misunderstanding of how your credit score is calculated can cause you to make a lot of mistakes while using your credit card. You may end up doing things you think will help you to have a good score, whereas they will be doing the exact opposite, hurting you.
Hence, it is important to know the factors that determine your credit score so that you can make wise decisions concerning your credit. How are credit scores calculated? Popular credit bureaus often use the FICO or the VantageScore model.
Below are the latest FICO and VantageScore credit rating factors and their scores in percentages.
- Payment history (early or late payments?) – 35%
- Credit utilisation (too much or less debt owed?) – 30%
- Length of credit history (average age of your credit accounts) – 15%
- Credit mix (different types of credits you have) – 10%
- New credit (“hard enquiry” into your recent credit applications) – 10%
- Payment history – 40%
- Credit age and mix (depth of credit) – 21%
- Credit utilisation – 20%
- Balances – 11%
- Recent applications for credit – 5%
- Available credit – 3%
So, with this knowledge, we want to assume that you now understand how your credit score is calculated and what to expect as you use your card. If you want to know what a good credit score is, read our beginner’s guide to credit scores. In the article, you will find reliable information on credit scores according to Experian, TransUnion, and Equifax, which are the most popular credit bureaus.
If you have applied for a credit card and are now regretting it, you might be able to get your application cancelled. But cancellation is possible only if you can get in touch with your credit provider before they decide whether to approve your application.
People commonly make the following five mistakes with their credit cards:
- Applying for too many credit cards.
- Paying your credit card bill late.
- Making only the minimum payment on your credit card.
- Not checking your credit card billing statements often.
- Not understanding your credit score.
Your credit score is not directly impacted by not using your new credit card. However, your issuer could eventually shut the account owing to inactivity, which might have an impact on your score by reducing the total amount of credit you have access to. Therefore, it is crucial to avoid creating accounts you don't actually need.
No, once you've authorised a transaction or purchase, you cannot cancel it. You would have to get in touch with the retailer or merchant personally if you completed a transaction but afterwards changed your mind about the purchase.
There are three options for cancelling the credit card you applied for:
- Contact the customer care service of your credit card issuer and make a formal request for the cancellation of your credit card.
- Send a written application letter to the manager of your credit card issuing company to request that your account be cancelled or closed.
- Use the card issuer’s website to log in to your account and use the “Cancel” or “Close” functionality. The credit card cancellation form must be completed and submitted through the site. Following the filing of your request, the executive staff of the bank may call you to confirm your action.
Credit card mistakes are made in various ways, such as:
- Paying your credit card bill late.
- Making only the minimum payment on your credit card.
- Going on a spending spree.
- Keeping a high balance on your credit card.
- Taking out a cash advance on your credit card.
- Chasing credit card rewards.
- Not paying off big purchases during a 0% APR period.
Credit cards enable you to spend now and pay later while also helping you establish a credit history and score. However, when used carelessly, they can potentially permanently damage your credit history and score, preventing you from obtaining loans. So, use credit cards only when you need them for necessary expenses. Otherwise, avoid them.
The Bottom Line
As you can see above, all the mistakes we have brought to your awareness in this article can give you a bad credit score. Avoid all of them! Lenders consider your credit score when processing your application for credit. Hence, these mistakes can get you a rejection on your next credit application. Therefore, above all, you should do your best to keep your debt low by using your card only when necessary, making early and complete payments, and avoiding the temptation of making applications for too many credit cards.