What Are the Biggest Mistakes You Can Make When Using a Credit Card
Credit cards offer convenience, rewards programs, and the ability to manage your finances effectively. However, if not used responsibly, they can lead to debt and a damaged credit score. Here’s a breakdown of the five common credit card mistakes and traps to avoid to keep your credit score healthy:
Mistake 1: Making Only Minimum Payments
Credit cards often offer a minimum payment option for each monthly statement. This feature seems helpful at first glance, but that isn’t always the case. Paying only the minimum amount will cost you money as you end up paying more interest and digging yourself further into debt.
To avoid this trap, aim to pay your balance in full each month. This way, you can steer clear of snowballing interest and keep your credit score healthy.
Mistake 2: Carrying a High Balance on Your Credit Card
One of the biggest credit card mistakes you can make is carrying a balance on a credit card. High credit balances may result in two scenarios which can affect your credit score (CTOS or CCRIS score).
The first is through credit utilisation. This refers to the amount of debt you have compared to available credit. A FICO study found that the lower your credit utilisation, the better — since your utilisation affects your credit score just as much as failing to make regular payments.
Secondly, carrying a high balance can also incur enormous costs due to interest. Interest charges can quickly add up on a credit card balance, trapping you in a cycle of debt. If you have to pay interest on the loan, conveniences like cashbacks will be useless.
To avoid this credit card mistake, develop a budget to track your spending and avoid overspending. You should also aim to pay your balance in full each month to prevent interest from accruing.
Mistake 3: Missing a Payment
Another credit card mistake is late or missed payments. Delinquent payments can also damage your credit score, especially if you are more than 30 days past due. According to the same FICO report, a delay of more than 30 days may cause a 17 to 83-point decline. And a 90-day delay would result in a drop of 27 to 133 points.
You won’t experience a decrease in your credit score if your payment is overdue by less than 30 days. This is because payments must be past due a full 30 days before being reported to the bureau (Credit Bureau Malaysia, CCRIS, CTOS, or Experian). However, you may incur a fine or interest rate penalty if you do not pay off your debt early.
To prevent this from happening, you can enable automatic payments. That way, credit payments are always made on time. Alternatively, set reminders to ensure you never miss a due date. You can utilise a calendar app or planner to track your payment deadlines.
Mistake 4: Not Reviewing Your Credit Card Statements Regularly
Verify the accuracy of every transaction reported on your bill. If there is fraud or misreporting, you can take action immediately. At the very least, you should review the monthly report to ensure that no errors have been made on your credit card bill. Be mindful of recurring payments and standing instructions so that you are prepared for them.
This practice helps you also monitor possibly fraudulent charges that might occur.
Mistake 5: Applying for Too Many Credit Cards in a Short Period
When you apply for credit, a new inquiry will appear on your credit report — the more inquiry that arises in a short period, the greater your risk. You will be perceived as a risky borrower desperate for credit from the banks. Additionally, your CTO score and CCRIS will both reflect this.
Additionally, it’s best to avoid having multiple credit cards as more cards may lead to an increased risk of debt, and more debt equals negative credit scores. To avoid this common credit card mistake, only apply for cards when necessary and space out your applications (ideally no more than once every six months) to minimise the number of hard inquiries impacting your credit score at once.
The Bottom Line
Credit cards are meant to offer us an immediate line of credit in the event of emergencies, Aside from that, credit card companies offer perks, points and great discounts when used responsibly. The trick is to spend within your means and remember to pay your bills in full to enjoy the actual benefits of having a credit card in your wallet.
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