Your credit score is not just a number; it’s a crucial indicator of your financial health. Building and maintaining a good credit history is essential, but it requires understanding how certain actions can impact your credit profile. In this guide, we’ll explore common credit mistakes and provide valuable insights on how to steer clear of them, drawing from reputable sources like Experian and CNBC Select.
Carrying a Balance
One pervasive credit score myth is the idea that carrying a balance on your credit card can improve your credit score. Contrary to this belief, carrying a balance month-to-month can actually harm your credit. According to Experian, maintaining a high credit utilization rate, which is the amount of debt you have compared to your available credit, can negatively impact your score.
Making Only Minimum Payments
While it’s essential to make at least the minimum payments on your credit card, relying solely on this approach can lead to increased debt and unnecessary interest charges. CNBC Select advises against paying only the minimum due, as it can extend the time it takes to pay off debt, adding months—even years—to your repayment timeline.
Late or Missed Payments
Late or missed payments can have serious consequences for your credit score. CNBC Select cites FICO data, noting that a 30-day missed payment can result in a credit score drop of 17 to 83 points. Beyond 30 days, the decrease can range from 27 to 133 points. Setting up autopay or using calendar reminders becomes crucial to ensure on-time payments.
Neglecting to Review Billing Statements
Regularly reviewing your credit card statements is not just about monitoring your spending; it’s a proactive measure to detect potential fraud early. Experian emphasizes the importance of checking for accuracy and recommends being proactive in reviewing your charges regularly.
Not Knowing Your APR and Applicable Fees
Understanding the terms associated with your credit card is vital. CNBC Select highlights key terms such as annual fee, purchase APR, balance transfer APR, penalty APR, late payment fee, foreign transaction fee, and balance-transfer fee. Knowing these terms helps you make informed decisions about your credit usage.
Taking Out a Cash Advance
Taking out a cash advance on your credit card may seem convenient, but it comes with risks. Immediate interest accrual and cash advance fees make it a costly choice. CNBC Select warns against this practice and suggests exploring alternative financial options.
Not Understanding Introductory 0% APR Offers
Introductory 0% APR offers can be a great way to save on interest charges. However, CNBC Select advises consumers to review the fine print, including the start and end dates of the introductory period. Being aware of the terms after the offer ends is equally important.
Maxing Out Your Credit Card
Using the majority or all of your available credit is a risky move. It results in a high credit utilization rate, negatively impacting your credit score. CNBC Select stresses the importance of maintaining a low credit utilization rate and offers strategies for responsible credit card usage.
Applying for New Credit Too Often
Each credit application triggers a new inquiry on your credit report. CNBC Select recommends applying for credit strategically, ideally not more than once every six months. Utilizing pre-qualification forms can help you check eligibility without damaging your credit.
Closing a Credit Card
Closing a credit card can have implications for the average length of your credit history. CNBC Select advises against closing a credit card, especially your oldest one, as it affects the average age of your credit. However, there are instances, such as high annual fees, where closing a credit card may make sense.
Avoiding these common credit mistakes is key to building and maintaining a healthy credit profile. Regularly checking your credit report, making on-time payments, and understanding the terms associated with your credit cards are crucial steps. As you navigate the complexities of credit, remember that responsible credit management is a long-term strategy for a financially sound future.
