Credit cards aren’t just a convenient way to make payments and pocket rewards—they also play a pivotal role in formulating your credit score. Next to your annual income, your credit score is one of the most important measures of your financial life and can affect your chances of being approved for everything from car loans and rental applications to a mortgage, not to mention the interest rate you pay on these debts.
The higher your credit score the more lenders trust you, and the more lenders trust you, the better rates, products, and offers you will receive. It’s as simple as that. So with that in mind, here’s a breakdown of the most common credit card mistakes to avoid in order to maintain a good credit score.
Ten Worst Credit Card Mistakes
1. Cancelling Your First Credit Card
If you’re like many Canadians, your first credit card was a student credit card that you got in university before you had much choice. But as you build credit, your options broaden, and you might find yourself not using that old college card as much anymore. Resist the urge to close that account! Your first credit card and the length of your credit history are closely entwined so cancelling it can be one of the worst credit card mistakes you make.
2. Ignoring the Interest Rate
Legal jargon and run-on sentences, all laid out in 6-point font? It’s not called the fine print because folks love it. Still, it’s important to understand your credit card terms to avoid ugly surprises come billing day. Be aware that many credit cards carry a similar purchase interest rate of around 20%. But there are also low-interest credit cards available in Canada, where you might snag an interest rate below 12%.
3. Missing Payments
Credit cards are essentially short-term loans by a friendlier name. Every time you use plastic to pay for something, you’re using borrowed money to foot the bill — money that you’ll have to pay back within a specific time frame. How reliably you do this has a direct impact on your creditworthiness. In fact, estimates suggest that your payment history accounts for a whopping 35% of your total credit score, making it the single most important determining factor. Don’t miss a payment. Be prepared to pay at least the minimum payment each and every month.
4. Making Only Minimum Payments
That being said, do not only make the minimum payment listed on your credit card statement. Doing this will balloon your debt, getting you deeper into the red and making it increasingly difficult to pay off your debt.
If you find yourself unable to pay down your outstanding debt, a good strategy is to transfer it to a balance transfer credit card — a credit card that offers low or no monthly interest on balance transfers, usually for 9-12 months. Some even offer 0% interest for a limited time.
If you have a credit card, you know that overspending is super easy and super bad. What you might not know is that it can negatively affect your credit score.
Aside from being hit with costly interest charges, carrying credit card debt can affect your credit utilization rate. Credit utilization refers to how much money you owe relative to how much you can borrow, and if you’re regularly carrying a balance, your utilization rate will be high. If you’re accumulating debt, consider getting a balance transfer credit card or consider a debt consolidation loan.
Another option to curb your spending: get a prepaid credit card. They’re more like debit cards or gift cards because you’re not borrowing money or paying interest. Instead, you tap into the funds that you’ve loaded onto the card. Some even offer cash back on your purchases!
6. Maxing Out Your Card
Wait, didn’t we just talk about this? No, we did not. While you might overspend and max out your credit card, the very act of spending close to your limit (whether you’ve budgeted for it or not) can increase your credit utilization rate. This signals that you’re over-leveraged and borrowing too much.
If you’ve maxed out your credit card, do what you must start paying off your debt ASAP. If approaching your limit is a regular occurrence, ask for a credit increase from your credit card provider.
7. Loaning Out Your Card
It can be tempting to loan out your card, particularly if it means you can double dip on rewards or cash back. Bad idea! You’re responsible for paying the bill—not the person to whom you loaned the card. This goes for loans of your primary card and additional cards on the same account. Unpaid debt can be a real hit on your credit score. Unless you’re prepared to pay for all the purchases, never loan out your card.
8. Failing to Get Rewards or Cash Back on Your Spending
This mistake won’t hurt your credit score, but it will affect your wallet. Credit card companies court your business by offering valuable rewards. A little shopping around should net you a healthy kickback in the form of travel rewards, program points, or cold, hard cash back on spending you’d be doing anyway. If you’re a travel junkie, get yourself a travel rewards credit card. If cash is king, use a cash back credit card and earn money back on card purchases.
9. Applying for Too Many Cards at Once
Once you’re hip to the possible rewards available with credit card spending it can be easy to get carried away. If you’re considering getting a bunch of cards with different rewards simultaneously – don’t. This is one of the worst credit card mistakes you can make because each application affects your credit score. The impact is small for each card but can add up with multiple inquiries and can also signal to creditors that you’re having a financial problem. Instead, try to space out your applications and really think about how many credit cards should you have.
Additionally, the annual fees on multiple cards add up fast. Your best bet may be to carry one or two credit cards with no annual fees. Some no annual fee credit cards even offer rewards.
10. Not Carrying a Credit Card At All
With all these caveats, you might think that carrying a credit card is just too risky, but not carrying a credit card is one of the worst mistakes you can make. It prevents you from building a credit score, and without that, you’ll have a very hard time getting a loan, buying a car, or securing a mortgage.
A credit card that’s paid off regularly provides lenders (such as banks) with proof that you can be trusted with money. The longer you possess your credit card and use it wisely, the higher your credit score will be. And, if you follow our tips, you’re sure to maximize the benefits of credits cards—like rewards and cash back—while minimizing any costly mistakes.
If you have bad credit, it’s not game-over. One option is to get a card for bad credit, and by using it responsibly, improve your credit score over time. That’ll get you back in the black.