Last month I wrote a piece on what your credit score is, and how you can manage it, which you can find here. And while I did describe the importance of maintaining your credit score, I did not explain common mistakes credit card holders make, and how to avoid them.
Cash or Credit?
One of the greatest things about credit cards is that they can basically be substituted for cash, right? Wrong. While credit cards are a viable alternative to physical currency, it is incredibly important that you do not consistently substitute your credit card for cash. That may sound confusing, as a credit card is always technically a substitute for cash, so allow me to clarify. Using a credit card for everyday purchases like grocery shopping, gasoline refills or shopping for clothes is typically not a good idea. Ideally, credit cards are used for large purchases.
Giving the Bare Minimum
One of credit’s most enticing features is the minimum payment. Many credit card holders make large purchases and believe that they can save some money in the short term by only making the minimum payment. While this seems ideal at first, it is terrible in the long run. The interest will compound and make that once feasible $3,000 payment explode into a much, much worse number. Whenever you can, make more than the minimum payment. If you have a few extra bucks here and there, dedicate them to your credit card balance. It will be worth it.
Too Many Credit Cards
So you’ve just opened your first credit card. The world seems to be your oyster and you are now ready to make large purchases and build up your credit. So, logically, opening up several cards will make your credit grow faster, right? Again, wrong. Opening up too many credit cards, especially within a short amount of time, is a very bad thing. Not only does it naturally ding your credit score, it will make creditors suspicious as to why you are opening so many accounts, making them believe that you are unable to make payments. Only open up a credit card when it is absolutely necessary and when it makes sense.