Whether you’re new to the world of credit cards or have been using them for years, you may be making rookie mistakes with long-lasting consequences. Misusing credit cards can create mounds of debt that could take years to repay or damage your credit score, making it hard to get other forms of credit (such as a mortgage or car loan), rent an apartment, or even land a new job.
Avoid inadvertently making poor choices that could hurt your finances for years: Skip these amateur moves and find out what to do instead.
Closing an Account
Why amateurs do it: Sometimes people decide they don’t want to use a particular card anymore, so they close the account without realizing it will damage their credit score.
Why it's not a good idea: “Part of your credit score is based off the length of your credit history,” says Matthew Coan, owner of financial website Casavvy.com. When you cancel a card, your average length of credit goes down, meaning you lose credit-positive points.
What to do instead: Even if you stop charging purchases to your card, it’s better to cut it up and leave the account open, since there’s no penalty for having a credit card and not using it.
If you really don’t want to keep an account open because it carries an annual fee, then close only it if you still have another open card — closing all cards sends a red flag to potential creditors. Before closing, make sure you won’t be applying for a new card, mortgage, or loan of any kind for at least six months: If your average length of credit history goes down when you cancel, your credit score will temporarily drop, making it hard to open new lines of credit.
Applying for Too Many Accounts at Once
Why amateurs do it: People who are new to using credit can be dazzled by their newfound purchasing ability, and it can be hard to refuse big discounts that come with retail store cards. With so much temptation, it’s easy to open several accounts within a few months.
Why it's not a good idea: Applying for too many cards at once can hurt your credit score, says Sammie DelRosario, a Certified Personal Finance Counselor and manager of the debt management department at Debt Helper. “Every time you apply for a new line of credit, it registers on your credit report. Opening multiple credit cards at once sends a signal that you may be overextended.”
What to do instead: Instead of applying for numerous cards, focus on quality over quantity, says Kimberly Foss, CFP, author and founder of Empyrion Wealth Management. Keep a few cards, maintaining low balances and paying them off each month, instead of having several cards — especially if they were all opened within a few months. They’ll be easier to manage and your credit score will probably benefit.
Using Too Much of Your Available Credit, Even if You Pay Every Month
Why amateurs do it: When a card issuer offers a credit limit of $5,000, it may be tempting to charge up to the limit. But “because you can” is never a good reason to spend money.
Why it's not a good idea: Part of your credit score is based on your credit utilization, or the percentage of available credit that you’re using. Most credit experts recommend using 30 percent or less of available credit — using more can lower your FICO score.
What to do instead: Keep your credit utilization rate under 30 percent. If you find that you’re using too much of your total credit, then ask the credit card company to raise your limit, Coan recommends. (Note that this request can result in a hard credit inquiry that can temporarily lower your score by a few points.) Remember that a raised limit is not a free pass to spend more. Instead, the higher limit will make it easier to stay under that 30 percent mark.
Not Reading the Fine Print
Why amateurs do it: The font is tiny for a reason — companies want you to be “enticed by new cards offering ‘zero-percent interest rates’ and ‘no monthly fees,’” DelRosario says, without checking into the details.
Why it's not a good idea: When you don’t read the fine print, you don’t really know what you’re getting into — and several months later, you could be hit with a sky-high interest rate or surprise fees. “Those low rates don’t last forever,” DelRosario notes, so you should know what you’ve committed to.
What to do instead: Before you sign up for a new card, look carefully at the terms. For instance, what will the interest rate be after the intro period? If you transfer balances, what fees are involved? If you pay late, or exceed your limit, what penalties and fees can you incur? Are there any additional fees associated with carrying a balance on the new account? If you can answer all these questions, then you’re in a position to sign on the dotted line.
Opening Only One Card
Why amateurs do it: Many newbies believe that having only one credit card will help them build a strong credit score, but that’s not necessarily true.
Why it's not a good idea: “While having too many credit cards can affect your score, having only one can also hurt you,” DelRosario says. In fact, having multiple cards with low balances improves your credit utilization rate, which will boost your credit score.
When calculating your score, credit bureaus also take into account how many cards you have open. For a good credit score, you have to prove to creditors that you’re a “‘good risk,’ meaning you have a history of making diligent payments over a period of time,” Foss says. It can be hard to prove that with only one credit account.
What to do instead: Have two or three cards, even if you don’t use them all. “Have one card for daily purchases, a second for larger purchases that you can pay off over time, and a third card that can be used in case of an emergency,” DelRosario says, adding that it can also help to have a backup card in case your main card is lost or stolen.