While many consumers apply for credit cards to improve their credit history, misusing a credit card has the opposite effect. Easy credit card mistakes that harm your credit history include sending late payments or making minimum payments.
Although these two mistakes may seem harmless enough, the consequences of these actions add up over time. For instance, paying your bills after the due date will not only earn you a late fee. Over time, late payments may also affect your credit score.
Meanwhile, making only minimum payments on your card ensures that you will pay much more in interest compared to what you would spend paying it all off each month. Additionally, it will take you much longer to repay the account balance.
If you have a credit card, it’s important to use it wisely. To learn more about how simple credit card mistakes can harm your credit, review the information below.
1. Failing to Make Payments on Your Credit Card
Making late payments on your credit card is never a good idea. Luckily, if you make the payment within 30 days of its due date you can usually avoid doing harm to your credit score.
However, if you fail to make payments on a credit card for six months, your card may be “charged-off.” If this happens, you cannot use the credit card until you pay off the debt.
If your account is charged-off, you will likely be contacted by a debt collector, and the incident will remain on your credit report for seven years — even after you repay the full minimum payment amount. In some states, you could even be sued if your account reaches charge-off status.
Once you repay the minimum amount, your credit report will read “charged-off paid” or “charged-off settled.’ However, any charge-off at all on your record looks bad to lenders. Therefore, after you repay a charge-off, you may still have trouble obtaining future loans and credit cards.
In some cases, you can negotiate with the creditor if you repay the balance in full to remove the incident from your credit history before the end of the seven-year period. To do so, contact the original creditor to negotiate a solution for removing the charge-off from your credit report. You can also choose to send the original creditor a pay for delete letter.
2. Charging Your Credit Card Beyond the Limit
Maxing out your credit card is never a good idea, as doing so negatively effects your credit score and the current interest rate that you qualify for. Additionally, maxing out your credit score generally results in penalty fees.
Most financial experts agree that your current credit card balance should never exceed 30 percent of your credit limit. If your credit limit is $1000, for instance, your balance should not exceed $300. However, a $0 balance is ideal and you should always aim to repay your balance as quickly as possible.
To reduce the risk of exceeding your limit, keep an eye on your billing statements. Not only will this help to protect you from fraudulent activity or incorrect information, but you will also reduce your risk of missing payments or over-charging your account.
Once you get close to your credit limit, pay with cash. Additionally, you can talk to your bank account about extending your credit line to increase the amount you can spend without harming your score.
3. Applying for Multiple Cards Within a Short Time Frame
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If you are trying to build your credit, you may feel the need to apply for more than one credit card at once. However, doing so can hurt your credit score, making it more difficult to get approval from future lenders.
Whenever you open a new credit card, the following things happen:
- Your average credit age lowers. Your credit history age makes up 15 percent of your credit score, and your credit age lowers whenever you open a new credit card account. Older credit ages earn more points, as they show more credit experience.
- An inquiry is placed on your crediting report. When you attempt to open a new credit card, businesses investigate your credit history to determine whether they should accept your application. These inquiries are recorded on your credit report whenever a request is made, even if your application is denied. Each times an inquiry is recorded, it reduces your credit score by several points.
- You may raise your credit utilization. If you open a new credit card just to make a large purchase, you could raise your credit utilization and lower your credit score. Generally, the less available credit you have, the higher your credit utilization will be. Therefore, keeping your credit card balance below 30 percent of your limit is ideal for maintaining a good credit score.
4. Closing a Troublesome Credit Card
Once you repay a delinquent credit card, you may want to close the account to avoid using the card again. However, doing so could harm your credit score since you will be both lowering your amount of available credit and closing credit history.
If any of the following factors apply, repaying the credit card and keeping it open is a better solution for maintaining a good credit score:
- The delinquent credit card is the only credit card you have.
- You have not repaid the balance on the credit card.
- The credit card is the only card you have with an available balance.
- The card comes with numerous perks such as low interest rates, rewards and no annual fees.
- The troublesome credit card is the oldest account you have.
Instead of closing a delinquent card, especially one with high fees or poor terms, find out if you can switch it to a different card with better terms. While changing cards generally does not impact your credit score, closing an account does.
However, there are several instances when closing a credit card is best. For instance, if the terms of the card are poor and you are paying more just to keep the account open, you will be better off repaying the balance and closing the account.
If you were a victim of identity theft or fraudulent activity, you may want to close the account. However, most banks allow you to request a new number instead. Finally, if you recently opened a credit card but do not use it, you may close the account if you repay the balance and have other open credit cards to use.
