The very idea of credit cards is quite simple and straightforward: issuers essentially give you a tab and you pay it down each month or pay it back with interest over time. However the truth is that the system is much more complicated than that synopsis suggests. Thanks to things like credit scores and credit card rewards, there is plenty of room for error when it comes to these popular plastic rectangles.
Beyond the basics (like paying more than just your minimum each month), here are a few credit card mistakes people too often make:
Closing your account
As strange as it may sound at first, it’s true that closing your credit card can actually hurt your credit scores. That’s because the average age of your credit makes up 15% of your overall scores. Furthermore closing cards you’ve had for a longer period of time will do even more damage.
With that said, if the card you’re looking to close is newer, it may not be as big of an issue to say “goodbye” to it. Additionally the financial benefits of closing an account anyway — such as avoiding another year of annual fees — may outweigh the potential hit your score might take. Still, when possible, it’s best to keep all of your cards and accounts active in order to keep your scores as high as they can be.
Putting too much on one card at a time
Another quirk of the credit score system is that you could be penalized for putting too much on your card, even if you’re below your limit. In fact sites like Credit Karma recommend keeping your balance below 30% of your limit — although under 10% is even better. To accomplish this you may want to consider asking for a credit limit increase to give you some more breathing room or perhaps even opening a new card to help bear the load.
Using the wrong card for your purchases
Not all credit cards are created equally. That’s probably why most people hold onto multiple cards from different issuers and brands. Since the perks of these cards — including cash back percentages or point accruals — can vary, thinking ahead about which card to use can add up to some significant savings.
Some things to look out for are the bonus categories that some cards offer such as higher cash back rates on gasoline or dining. Many cards also maintain some kind of offers program where you can earn extra rewards when you activate deals from retailers and other establishments. Finally, if you’re traveling overseas, be aware of which cards charge foreign transaction fees so you can avoid these additional charges.
The credit system can be very confusing at times. As a result all too many of us make mistakes that could hurt our scores or cause us to spend more than we should. By avoiding these three credit card errors you’ll help keep your credit in pristine shape and hopefully put some more money in your pocket.