10 Credit Mistakes You Must Avoid

10 Credit Mistakes You Must Avoid

November 6, 2023

Credit cards can be a valuable financial tool when handled carefully. They offer a convenient means to establish and build your credit history, boost your credit score, and even earn rewards on your everyday expenses. However, using a credit card can have both positive and negative implications, especially if you're dealing with growing debt and financial management challenges.

It's crucial to maintain responsible credit habits because otherwise, you might fall into a cycle of high-interest credit card debt that might lead to long-term financial losses.


Here are ten common credit mistakes that you must avoid:


1. Missing due dates and making late payments

Frequently missing the due dates on your bills might not seem significant at first, but it can have a substantial impact on your overall financial well-being. Your payment history plays a pivotal role in determining your credit score, making it essential to ensure your payments are consistently on time. Here's why punctuality is crucial:

  • Credit report consequences: Late payments can linger on your Equifax credit report for as long as seven years from the date of the missed payment, even if you eventually settle the overdue balance.

  • Credit Score Impact: Your credit scores heavily depend on your payment history, and late payments can have a detrimental effect on them, depending on the credit scoring model used.

  • Accumulating Debt: Late payments can cause your debt to accumulate rapidly. Credit card companies often add late fees, which can be substantial, and these fees continue to accrue interest over time.

To avoid these consequences, it's best to make a habit of never missing due dates. Stay informed about your bill deadlines and consider setting up reminders on your phone or using a calendar to ensure timely payments.


2. Paying only the minimum amount

Opting to pay only the minimum amount on your credit card each month may not be the most financially prudent choice. If possible, try to clear your credit card balance entirely every month. The higher your credit card balances, the greater the interest you're likely to incur.

If you find it challenging to cover the full credit card debt, aim to pay off as much of it as possible. Ignore the "minimum payment" figures and instead pay off as much as you can afford to your credit card bill each month.


3. Maxing out the credit card limit

Utilizing your credit card to its maximum limit, known as "maxing out," can have adverse consequences. Maintaining balances that reach your credit limit not only leads to increased interest charges but also has a detrimental effect on your debt-to-credit ratio. 

This ratio signifies the proportion of your available credit that you are currently using. In general, creditors and lenders view favorably a debt-to-credit ratio below 30 percent. If this percentage exceeds that threshold, it can potentially harm your credit scores.


4. Having multiple credit cards

Resist the temptation to chase after every credit card welcome bonus that catches your eye. The number of credit cards you should carry should align with your comfort level and your ability to effectively manage them.

Having multiple cards with substantial credit limits can potentially raise concerns for lenders. This could complicate securing loans like mortgages or car loans, even if you maintain a commendable credit score.

Maintaining an excessive number of credit cards can have its advantages, especially if you're good at managing your finances. If not, then it’s better to stick to one or two credit cards, at least until you are confident in your ability to handle more.


5. Not comparing loan offers

Accepting a loan offer without comparing it to others is a missed opportunity to secure the best possible deal. The terms of your loan play a significant role in determining your overall cost, and even a slight variation in interest rates can result in significant cost savings.

While it's true that each credit application triggers a hard inquiry on your credit reports, potentially affecting your credit scores, there's a beneficial exception when shopping for specific types of loans like vehicle loans or mortgages. Multiple inquiries of the same loan type within a defined timeframe are generally treated as a single inquiry for credit scoring purposes.


6. Taking a cash advance

A cash advance is a financial service offered by your credit card issuer, allowing you to withdraw cash from your available credit card balance. It's important to note that cash advances are associated with substantial interest rates and fees.  Unlike regular credit card transactions, most cash advances lack a grace period, meaning interest begins accumulating immediately upon the withdrawal.

Therefore, it's advisable to explore more cost-effective alternatives. In emergency situations, a cash advance can provide rapid access to funds, but it's crucial to have a clear repayment plan in place to settle the amount swiftly.


7. Not checking credit reports

Failing to regularly review your credit reports can have negative consequences. Since your credit scores rely on the data in these reports, it's advisable to check your credit reports at least once a year. Inaccurate or missing information in your credit reports can potentially harm your credit scores, which, in turn, may affect the interest rates available to you.


8. Overreliance on your credit card

It can be tempting to rely on a credit card when your bank account balance hits zero. However, the harsh reality of a 20% to 30% interest rate becomes apparent as soon as you miss a full and timely repayment on the borrowed funds. 

To navigate this wisely, reserve your credit card for purchases that you are confident you can fully pay off when your credit card statement arrives. By using your card for these purchases and settling the balance in full every month, you'll not only save money on your day-to-day expenses but also enhance your credit score in the process.


9. Not checking your credit score

Although credit scores are generally not included in credit reports obtained from the three major credit bureaus, there are various ways to access this information. Some credit card companies and financial institutions offer credit scores to their clients. Alternatively, you can utilize a credit score service, explore a free credit scoring website, or directly acquire scores from one of the three prominent credit bureaus or another authorized provider.

Timely and complete bill payments are instrumental in improving your credit score and increasing your likelihood of obtaining credit in the future. On the other hand, being late with payments can harm your credit score, making it a path to avoid.


Read: What is a Credit Bureau and How Does it Work?


10. Closing paid-off credit card accounts

Closing a credit card account that has been paid off can result in adverse effects on your credit. It may increase your debt-to-credit ratio, which could have a detrimental impact on your credit scores. Additionally, closing the account might alter the diversity of your credit accounts. 

Typically, lenders and creditors prefer to observe a mix of credit accounts. If you've maintained the account for an extended period, closing it might lower the average age of your accounts, potentially leading to a negative impact on your credit scores. In general, lenders and creditors appreciate seeing a track record of responsibly managing various types of credit over time.

In conclusion, managing your credit wisely is crucial to your overall financial well-being. Credit cards can serve as valuable financial tools when used responsibly, helping you establish and enhance your credit history, earn rewards, and simplify your everyday expenses.