Credit cards can be important financial tools to help you make the most of your money and build credit—when used responsibly, that is. But if you’re not careful, credit cards can get you into trouble if you charge more than you can afford, miss payments, or never pay your balances off in full.
Here are six mistakes to avoid making so your credit card works to your advantage:
1. Not Paying Your Credit Card Bill on Time
The most important thing you must do when using a credit card is to always pay your bill on time. Each month, your credit card issuer will send you a billing statement, tallying up the charges you made in your most recent billing cycle, which is typically about 30 days long.
The closing date of your billing cycle is the last day charges will go on that month’s billing cycle. The statement will also include a payment due date, which can be anywhere between 15 to 30 days after the closing date. The time in between is known as the grace period.
You must make your payment by the due date in order to avoid late fees, increased interest rates, and blemishes to your credit reports that will result in lower credit scores. With most credit scores, paying your bills on time is the biggest factor in determining your score (it makes up 35% of your FICO® Score). If you’re worried about missing payments, most credit card issuers offer the ability to schedule your payments in advance.
You can also set up automatic payments each month, or schedule email or text reminders before your due date so that you remember to pay on time. If you can’t manage to pay your bill on time every month, then you should reconsider whether a credit card is right for you.
2. Not Paying Your Credit Card Balance Off in Full
When your card issuer sends you the monthly statement, it will include a minimum amount due. This is typically a fixed dollar value or a percentage of your balance—whatever is higher.
For example, if you don’t charge a lot on your card, you might have a fixed dollar amount of something like $29. If you have a higher balance, you might have to pay something like 2% to 3% of your statement balance.
It can be tempting to simply pay the minimum amount due but try to pay off the full statement balance each month whenever you can. If you don’t, your card issuer will start charging interest on your average daily balance. Any new charges you make will begin accruing interest immediately.
It’s a sure way to quickly multiply your debt. (The amount of interest you’ll be charged will be based on your card’s APR (annual percentage rate).
In addition to keeping your debt in control, paying off your balance in full will also help your credit scores because you will be keeping your credit utilization ratio low. We’ll explain more about that in the next section.
3. Not Maintaining Low Credit Card Balances
The amount of money you owe on your credit cards vs. the amount of credit you have available to you is know as your credit utilization ratio. Almost all credit scoring models reward consumers for having a low credit utilization ratio—under 30%, and for the best scores, under 10%. That means that if you have a credit limit of $10,000, you want to keep your monthly revolving debt under $3,000.
If you pay off your balance each month, you are more likely to have a favorable credit utilization ratio because you are not adding to your credit used each month.
However, the amount you put on a card, even if you pay it off each month, does count toward your credit utilization ratio. So you should try to keep your monthly statement balance to less than 30% of your credit card’s limit.
The key to maintaining a low credit card balance, of course, is to never charge more than you can afford. Don’t use your credit card to buy things you don’t have money for. If you can’t afford to pay a purchase off in full immediately, don’t put it on a credit card. That’s a surefire way to rack up debt that can spiral out of control.
4. Not Monitoring Your Credit Card Statements for Fraud
When you receive your credit card statement each month, don’t just blindly pay off the amount due. Take some time to scan your purchases to make sure you haven’t accrued any fraudulent charges.
Credit card fraud can happen to you if your credit card is involved in a data breach, or if someone steals your credit card or card number. If you are the victim of credit card fraud, you’ll want to immediately contact your credit card issuer or financial institution.
5. Not Spending Wisely on Your Credit Cards
You can use credit card statements to help track your spending as part of a budget. This will help you flag areas where you can cut costs. Also, while reviewing your credit card statements, look for any recurring charges that you don’t need anymore or may have canceled—like a subscription to a streaming service you don’t use, for example. It’s easy to miss small charges that can lead to big debt if you’re not careful.
6. Not Making Sure You’re Using the Right Credit Card for You
You should also pay attention to the type of charges you’re making, because you may be able to find a credit card that is better suited for your needs—whether that means getting a new credit card with a low-interest rate or one that offers rewards.
For example, if you spend a lot of money dining out, there are several credit cards that will pay you 3% cash back on restaurant purchases. Or, if most of your spending consists of gas and groceries, there are several cards that will reward customers for making those purchases with lucrative cash-back rates.
Credit cards also often come with added benefits like travel insurance and fraud prevention. So practice the good habits described above and make sure you’re taking full advantage of everything your credit card offers.