Carrying the plastic means you're susceptible to a host of temptations and mistakes that can bring regrets later. Savvy cardholders know to resist them. Credit cards can be a great asset or a great liability, depending on how a cardholder uses them. While you probably won't go to hell for committing any of these sins, the financial situation you will find yourself in afterward can certainly cause some pain to your pocketbook and damage your credit score. Read on to find out the seven deadly credit mistakes you should avoid at all costs.
1. Gluttony: Bumping up against your credit limit
Just because your issuer awarded you a $6,000 credit limit doesn't mean you should max the card out. For starters, those who aren't able to pay off their balances in full increase the likelihood of winding up in debt, since they'll be subject to the interest on their purchases. Secondly, bumping up against your credit limit is likely to have a negative overall impact on your credit score. "The closer you get to your credit limit, the riskier your credit profile is going to look," says Chris Mettler, the founder of CompareCards.com, since it leads to a high credit-to-debt utilization ratio. Mettler says it's best to use credit in moderation, using only 15% or less of your total credit at any given time. And yes, you should also pay off all those balances in full by the end of the month whenever possible.
Not checking your credit report You might assume your credit score is in fine standing based upon a presumably stellar payment history, but the truth of the matter is that credit reports can easily contain errors. And the more egregious ones, like inaccurate delinquencies or improper credit limit information, can cost you more than a few points on your accompanying credit score. Consumers therefore should check their credit report at least once a year -- especially since you're entitled to one free copy each year, thanks to the Fair Credit Reporting Act -- or right before you apply for a big loan, to minimize the chances that you'll encounter any surprises.
Applying for too much credit Lucrative sign-up bonuses can certainly be attractive, but that doesn't mean you should apply for every credit card that's touting one. Too many credit card inquiries -- generated by lenders that are looking to see if you deserve a new line of credit -- in a short time frame can also negatively affect your credit score. Instead, apply for credit as you need it, and add a new card to your payment arsenal about once a year until you've got three or four you can consistently pay off on time at your disposal.
Taking out a cash advance It may seem like a great idea to use your credit card to get a cash advance at a casino so you have some cash to gamble with, but in addition to the lousy odds you'll have trying to make the money grow, the paper comes with a price. "You're going to be charged a significant amount of interest," Mettler says, estimating that most transactions will carry an interest rate around 23% or higher. As such, it's best to use a credit card only in instances where the plastic itself can be used to make the purchase and you can pay back the funds by the subsequent bill's due date.
Applying for a card that's out of your league Your globe-trotting friend may continually flash a credit card that grants access to swanky airport lounges, earns free airfare and avoids foreign transaction fees, but don't let jealousy lead you to sign up for one of your own. Typically, cards of that caliber contain high annual fees that are worth paying only if you travel enough to justify the rewards. Instead, ask yourself a few questions to figure out what type of credit card is more suitable to your lifestyle. (You'll also want to checkthat your credit score qualifies you for the account so you don't rack up any of the unnecessary inquiries we were talking about.) There may be a great rewards card with no annual fee that will look much better with your name on it.
Closing all your credit card accounts Those who have gotten burned by their plastic may be inclined to cut up all the credit cards in their wallet and close all the accompanying accounts, but it's best to curb your anger. Closing accounts can negatively influence your credit-to-debt ratio, especially if the one card you're leaving open -- or transferring a balance to -- is bumping up against its credit limit. It's better to keep the account open but not use it, since that will keep your credit-to-debt ratio positively intact and not jeopardize the average age of your credit report.
Not checking your monthly credit card statements It can be easy to set up automatic bill pay on your account and then forget all about your credit card, especially in instances where you use it infrequently. However, it's a bad idea to skip checking your monthly credit card statements. "You can be paying for things you've signed up for and forgotten about," Mettler says, in addition to any fraudulent charges that may appear, courtesy of errors or, even worse, identity theft.