For new cardholders and those just beginning their journeys into the complicated world of credit ratings and credit cards, managing and understanding the many types of credit cards and their terms can become confusing.
While several areas of life allow wiggle room for trial and error, credit scores are less forgiving.
It’s very easy to make a simple mistake that can cost not just a significant drop in your credit score, but also thousands of dollars in the future. That’s why it’s important to beware of these five common mistakes millennials often make with credit cards.
1. Carrying Balances and Paying Just the Minimum
A common belief is that to build a positive credit rating, you have to get a credit card and also carry a balance from month to month. The problem, however, is that credit cards designed for new cardholders generally carry high APRs – as high as 25 percent. If you carry a balance from month to month and only pay your minimum monthly payment due, you are paying considerable cash in interest on purchases, which can potentially create a mountain of debt you can’t pay down. Build your credit rating and save on interest by paying your balance in full each month, instead.
2. Maxing Out Credit Lines
A new line of credit can be exciting and provide an opportunity to make a large purchase you’ve had your eye on for a while. At first, it can seem like a simple plan – make the purchase and slowly pay it off. Maxing out credit lines, however, can signal to creditors that you’re at risk of defaulting on your balances. Spending too much or maxing out your credit lines also affects your utilization ratio, an important factor in your credit score. Utilization ratio is the percentage of the total available credit the cardholder has used, and a high ratio indicates a higher credit risk. It is often recommended that you keep your total debt-to-credit ratio below 30 percent, which means you may have to put off that large purchase you’ve been dreaming of for a bit longer.
3. Focusing on Fancy Rewards and Promotional Offers
Many credit cards tout a range of special perks and rewards designed to attract new cardholders. While many of these opportunities can be worth hundreds of dollars in cash, airline miles or points, it’s important to be aware of what those rewards might cost you. The interest rate plus any associated fees can be more than the rewards and perks are worth. New cardholders are often better off building a positive credit rating by making timely payments on cards with low interest rates, rather than seeking cards with extra rewards or special promotional offers. Those offers will always be around, and you may be in a better position later to take advantage of them without it costing you as much or damaging your credit history.
4. Using a Credit Card for Everyday Purchases
The only time it’s recommended you use your credit card for everyday purchases like groceries and fast food is if you are earning specific rewards for those types of purchases, and if you pay them off every month in full. If you carry a balance and use your card for everyday purchases, $20 in toothpaste and toiletries can end up costing several times that. If you are unable to pay for living expenses with cash, you may need to readjust or create a budget before taking on the additional weight of a credit card.
5. Not Taking Due Dates Seriously
Although it’s common for most companies, such as your cellphone provider, to impose late fees when a payment is late, ignoring due dates on credit cards can become far costlier. Late payments not only significantly affect your credit rating but usually come with late fees as well as penalty APRs. One late payment can end up in an APR that’s well over 20 percent. That penalty APR combined with a late fee of approximately $30 (and the effect on your credit rating) can cost you hundreds – even thousands – in the end.