Credit cards are exciting because they allow you to borrow money for purchases, as well as collect points and rewards, sign-up bonuses and insurance benefits. There are, however, many common credit card mistakes that you can make, which could result in extra unnecessary fees or a decrease in your credit score.
We want to help you understand and avoid these mistakes, so check out these six common credit card mistakes and how you can avoid them.
1. Not checking your credit card statement
A credit card statement summarizes your credit card account activity within a predetermined billing cycle. A credit card statement includes information surrounding your credit card, such as payments, interest and purchases. You receive a credit card statement at the end of each billing period.
It’s essential you examine your credit card statement carefully to ensure there were no fraudulent purchases or outstanding balances. By regularly checking your credit card statement, you can identify potential issues and address them before they become significant or lead to avoidable fees.
2. Not paying your credit balances on time
Missing payment deadlines may cause your credit score to decrease. A good credit score is an important factor when it comes to loan applications and deciding your eligibility.
To avoid missing your credit card payments, try setting up automatic payments or electronic notifications to remind you when the payment date is approaching.
3. Only making minimum payments
If you only make the minimum payment on your credit card and leave a balance, that outstanding balance is carried over to the next month and you’ll incur interest on the balance that was carried forward.
Although making minimum payments sounds like an affordable solution, it can quickly become costly because interest rates can range anywhere from 13% to 23%.
To avoid incurring interest on your credit card balances, try paying off your entire credit card balance at the end of each billing period. If you’re unable to do this, try using a payment strategy such as the snowball method, where you start by paying off the credit card with the smallest balance, while continuing to make minimum payments on any other cards. If this process seems overwhelming, remember we're here to help!
4. Applying for multiple credit cards at once
Applying for multiple credit cards within a short period of time will decrease your credit score. This is because each time you apply for credit, a hard inquiry is placed on your credit report. This may cause your credit score to decrease, which will affect your credit score for about a year.
To mitigate this risk, try to spread out your credit applications to six months minimum.
5. Closing your credit card accounts
Unnecessary credit includes money borrowed for impulse buying or vacations that you normally wouldn’t be able to afford.
These purchases are often difficult to pay off at the end of each billing period because they are outside of your regular budget. That means these purchases will likely be carried over on your credit card across several months, incurring compounding interest.
Additionally, the more forms of credit you have, you could potentially miss a payment. When deciding what purchases are necessary to use credit, consider your needs and financial priorities. For example, a First Home Savings Account might be a good option for your mortgage renewal. Our advisors can help you decide what product is best for your needs.
6. Taking on unnecessary credit
Closing a credit card account can hurt your credit score for a few reasons, due to the result of:
- an increased utilization rate (the amount of available credit you have used up); and
- a decrease in available credit.
The optimal credit utilization rate is between 10% and 30% of your total credit, and this is where your credit score will be the most positively affected. If your current utilization rate is between 10% and 30% you may want to consider keeping the amount of open credit you have the same. Talk with an advisor to see what the best decision is for you.
Many people think if they don’t use a credit card, they should close the account – however, there’s a better solution! If you don’t use one of your credit card accounts, leave it open to maintain your available credit amount. If you choose to close your account, ensure you’ve evaluated your options and ensure you’re closing the account in good standing.