Credit cards are a wonderful tool to help you get more out of your spending, but they can also be a temptation that keeps you in debt. It all depends on how you choose to use them. However, even those who manage their credit cards wisely might be prone to these top three mistakes. Are you guilty of one?
1. Your Card Utilization is Too High
A major factor that affects your credit score is your credit card utilization. This percentage is based on the balances you have on each card compared to how much of a credit card line you have. For example, if you only have two cards with a $300 limit but you are at that limit, then your credit score will be penalized. On the other hand, if you have $5,000 of credit card debt but a $50,000 credit line on the card, your score will fare better.
But wait! Are you saying that a person with less credit card debt could possibly have a lower credit score because of their credit card limits? I know it doesn’t seem fair, but that is how about 25-30% of your score is determined. Even though the second person has more debt, they are showing that they can handle large credit lines without going overboard.
Luckily, there are two easy solutions to solve this issue. The first is to ask the card issuers for a credit line increase. Only ask for one if you can stay away from the temptation of spending. The second way to improve your card utilization ratio is to decrease the amount of debt you owe. Ideally, you should have no more than 30% of debt to your line of credit.
It’s important to note that your score is affected by having high balances even if you pay off the card each billing cycle and never pay a cent of credit card interest. I’ve used credit cards to pay for large expenses like my property taxes before to get more credit card points, and my credit score gets temporarily dinged every time because my utilization shoots way up when I do it even though I pay it off in full when the bill comes due. Getting the points is still worth it for me because I don’t care about a temporary penalty, but I would need to be careful if I was about to get a loan of some type in the future, say if I were to get a house or try to qualify for a car loan.
2. You Waste Your Reward Points
Earning points or miles on everyday spending is a perk. However, if you are cashing them out for cash or a gift card each month, you may be missing out on free money. Several credit cards have a better exchange rate for travel partners rather than redemption for cash or gift cards. It takes a bit of work to figure out the most efficient way to spend your points, but take the time because the time you spend on this activity can be the best paid part time job you’ll ever get.
Last year, my husband and I signed up for the Chase Sapphire card and used the initial 60,000 points (50,000 sign-on bonus, 5,000 authorized user bonus, and 5,000 through spending) to book an all-inclusive resort weekend through Hyatt. Our points earned us about $900 worth of travel. If we had just redeemed the points for cash or a gift card, it would have equaled $600.
3. Canceling a Card with an Annual Fee
Did you sign up for a card to get a sign-on bonus? Great! Before you cancel the card, there might be other alternatives that won’t ding your credit. Many credit card companies will be able to downgrade your card to one without an annual fee. This means you can ditch the high fee card without canceling your account. Another benefit is that your relationship with the company will stay active, which is also a factor in the credit score calculations.
Credit cards don’t have to be the pit to debt, but they do require smart handling. Have you ever been guilty of one of these credit card mistakes? How did it affect you?