Credit is a powerful tool. But making bad credit mistakes will ruin your budget, drown you in debt, and tank your credit score. So, one of the keys to credit is simply knowing which mistakes to avoid.
Credit card debt totaled $860 billion in the US in Q4, 2021. Consumer debt overall stood at $15.6 trillion in 2021 as well. The thing is, this debt is spread out very unevenly and covers debts of all kinds.
In this article, we will try to make sense of why so many people are struggling with credit. We will go over common mistakes, some of which may surprise you.
The first credit mistake that even highly intelligent people make is carrying a balance.
Carrying a balance on a credit card or other account is extremely costly. There are a few reasons people may do this.
First, some people see their “minimum” and assume it makes sense to just pay that.
Yes, paying your minimum is critically important. But you will still be charged interest on the rest of your balance after your current billing cycle ends. The thing is that minimums are literally that; minimal amounts you must pay.
They aren’t “minimums for avoiding interest charges”. You must pay your balances in full to not be charged interest.
Others simply forget, perhaps after missing deadlines, or otherwise end up carrying a balance.
But if your credit card carries an interest rate of over 16% (which it almost certainly does), you will end up spending thousands of dollars a year on a single credit card just for carrying a balance.
This is less costly than the first credit mistake but paying late means paying interest.
When you miss your payment deadline on your credit card, you will likely also face late fees. The combination of very high interest rates and late fees can then be made even worse by a third factor: rate increases.
When you start falling behind on payments, there is always a chance that the card issuer will opt to increase your interest rate. That rate change would be effective immediately, meaning it applies both when:
Credit cards probably don’t look great at this point…
So why not just decide to not bother with credit at all? After all, you’re frugal and maintain a healthy budget…
Many people think somewhat along these lines and decide to forgo credit entirely. However, this is a bad choice if you ever want to get a mortgage, car loan, or any other kind of loan in the future. If you cancel all your credit cards, you:
Even if you don’t close a credit account and simply don’t apply for one you…
It’s better to use a credit card, but with strict rules. You can:
Of course, you need to be aware and responsible, but you can make credit cards work for you!
For most people, shopping for a credit card isn’t an enjoyable type of shopping. It’s boring and annoying, so sometimes we want to get it over with quickly. But it’s worth it to seriously consider what you want out of a credit card. After all, they normally offer some of the following:
In addition, in the case things go wrong, you’ll wish you considered the cards with lower interest rates as well.
Take your time to pick the right credit card.
This mistake often lends itself to the three we went over above.
Credit cards don’t deserve any less attention than the attention you would pay to the cash in your pocket.
Credit cards are money, in at least one way; they have finite limits. Failing to budget properly can ensure you’re unable to pay your balances on time. Even in more forgiving cases, you’ll stretch your budget to pay your balance back, meaning your credit card is still costing you too much, albeit in an indirect way.
Missing a payment while you carry a large balance is by far the most serious credit mistake you can make.
Most other mistakes are easy to recover from. But missing payments for any reason while you carry a large balance can begin an uncontrollable debt cycle. If you’re charged hundreds one month for missing a large payment, your budget will be squeezed when the next payment is due.
This process can easily and quickly spiral out of control.
Entering a credit card-fueled debt spiral is one of the worst credit mistakes anyone can make.
While having no credit accounts is bad for building credit, so is having too many.
Besides, what credit bureaus will reward you for is having diversity in your credit use. So, having a responsibly used credit card and a line of credit is better than just having two credit cards.
Credit mistakes can only be avoided by paying attention.
Staying up to date with credit accounts ensures you receive the most benefits from them while not making the mistakes that damage your credit score and constrain your budget.
June 30, 2022