Time to Reevaluate
Credit cards can cause problems for those who overcharge and can’t pay their bills on time, but they can also be valuable tools for building credit history and reaping rewards. But to maximize credit cards as a valuable financial tool, you must use them correctly.
Unfortunately, many people believe they’re making smart moves with their credit cards when they’re actually doing the opposite. Here are six credit card moves that conventional wisdom might have told you were smart — but aren’t.
Canceling Your Credit Cards
It may seem like a good idea to cancel your credit cards so you’ll no longer be tempted rack up debt. While it’s smart to curtail your use, canceling them is a bad idea.
Credit score calculations are largely based on credit utilization, or the amount of debt you owe compared to the amount of credit available to you. When you cancel a credit card, you suddenly have less available credit, which “can increase your debt-to-credit ratio for a given amount of debt,” says Jason Steele, credit expert and contributing writer for CompareCards.
In addition, canceling a card stops your history with that account — and having a long, positive history with different types of credit can be viewed favorably when you apply for new credit, such as a mortgage. Instead, Steele says, store the cards you don’t need in a safe or cut them up. Just don't cancel them all at once.
Having Only One Credit Card
If you have only one credit card, it may be simple to manage your finances and avoid too much debt. But if you’re hoping to use that credit card to build a viable credit history — which will be needed if you ever want to obtain a mortgage to buy a house, for instance — that’s not going to work.
“You will have a difficult time building credit history with only a single line of credit,” Steele says. Instead, be willing to open a few credit cards and refrain from overusing them.
If you have bad credit and can’t get approved for a credit card, take steps to slowly improve your credit by paying bills on time, getting out of debt, and applying for and using credit only when needed.
There’s no magic number of credit cards you should have, but your credit score prioritizes your credit utilization, or the amount of debt you’re carrying versus the amount of credit available to you. If you have more cards, you’ll have more credit available to you, and your ratio can be lower. If you have other types of credit, such as a car loan or student loans, it may not be necessary to have as many cards.
Never Using Your Credit Cards
Similarly, if you have a credit card but never use it, you may be covered for emergencies, but you’re still not building a valuable credit history.
“Some people assume that just having a credit card helps build credit, but that simply isn't the case,” says Barry Choi, personal finance expert at MoneyWeHave.com. “Lenders want to see that you're using your credit card responsibly, and that means making transactions and paying your bills on time. Applying for a card and then never using it will not help you build your credit.”
Choi recommends setting bills to be automatically paid with a credit card as a way to ensure that the card is used on a regular basis without going on a spending spree. But you don’t necessarily have to use every card every month: “As long as you used your credit card on a regular basis before, and you made all your payments on time, it's okay to go months without using a card,” Choi says.
Opening Too Many Cards at Once
So maybe you want to build your credit quickly, but opening a bunch of cards all within a few weeks’ or months’ time is not the best way to do that.
“When you apply for any form of credit, you go through a credit check process,” Choi says. “This is like a small inquiry by the lenders to make sure you have a good credit history. Applying for a ton of new cards is usually a flag for lenders, so it'll appear like you're looking to access a lot of money fast, plus your overall credit score could take a big hit in a short time.”
Most experts recommend waiting at least 90 days between credit card applications, because too many inquiries around the same time period will ding your credit score.
Having a Low Credit Limit
It may seem like having a low limit on your credit card is positive because it will keep you from overspending on that card. But that’s not necessarily the case.
“If you do get approved, but just for a low limit, that's not a good thing,” Choi says. “The low limit implies that lenders are not comfortable lending you more money. It's better to pay off some of your current debts first and then apply for a higher limit later.”
If you’ve had a credit card for at least six months to a year and have paid bills on time and used no more than 30 percent of your credit limit, you can request an increase. Simply call a customer service representative and ask for a higher credit limit, citing your strong history with the card, or apply for an increase online.
Carrying a Balance to ‘Build’ Your Credit
Many consumers avoid paying off their credit cards in full, believing that they must carry a balance on their credit cards to build credit. But that’s a “huge misconception,” Choi says.
Instead of making sure you maintain a balance on each card, credit reporting agencies are more interested in seeing that you’re paying your bills on time consistently. So if you can, pay them off every month and save yourself the interest (and headache).