A credit card is a great asset, but when you use it incorrectly it can cost you a pretty penny. Carry a balance and pay high interest rate charges. Miss a payment and incur a late fee. Close a credit card and ding your credit score. The costs add up quickly. But it’s not hard to get into the habit of using your credit card correctly. And as a result, you can save money while building credit and maybe even take advantage of some sweet perks along the way.
1. Carrying a balance month-to-month
One of the biggest credit score myths is that carrying a balance on your credit card improves your credit. In fact, 22% of Americans carried a balance thinking it would increase their credit score. In reality, carrying a balance month-to-month hurts your credit score and costs you money. If you carry a balance, you’ll have a higher credit utilization rate, which is the amount of debt you have compared to your available credit. Experts agree that the lower your utilization rate, the better. A FICO study found “high achievers” — consumers with an average 800 FICO score — on average use a mere 7% of their credit limit.
2. Only making minimum payments
While you should always make at least the minimum payments, it’s not advised to only pay the minimum due. Not paying your bill in full can lead you to fall into debt and rack up unnecessary interest charges. Plus, just paying the minimum can add months — even years — to the time it takes you to pay off debt. Have a payment plan in place before you take on bigger expenses, and always make consistent, on-time payments toward your balance.
3. Missing a payment
Late or missed payments can seriously hurt your credit score if you’re more than 30 days past due. You can expect a drop of 17 to 83 points for a 30-day missed payment and a 27 to 133 decrease for a 90-day missed payment, according to FICO data. However, if your payment is less than 30 days late, you won’t see a drop in your credit score since a payment has to be a full 30 days past due before it’s reported to the credit bureaus (Experian, Equifax and TransUnion). But you may incur a late fee or penalty interest rate — which raises your APR.
4. Neglecting to review your billing statement
It’s important to check that the transactions listed on your bill are accurate so you can take early action against fraudsters or reporting errors. At the very least, you should review your monthly statement for errors. But it’s a good idea to check your transactions a few times each week to verify everything looks OK. You should be proactive about reviewing the charges that appear on your account so you can potentially spot fraud early and resolve any incorrect charges.
5. Not knowing your APR and applicable fees
When you apply and are approved for a credit card, you receive a long card member agreement that probably doesn’t top your must-read list. However, it’s important you parse through the jargon and review important account terms, so you understand all the applicable fees.
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