Credit cards can be great financial tools if you use them responsibly. You can earn credit card rewards on your everyday spending and build your credit with a positive payment history.
But if you use credit unwisely, you can dig yourself into a hole of debt and damage your credit score along the way. Here are the top seven credit card mistakes you should avoid at all costs.
1. Carrying a balance
You might have heard that you need to carry a balance on your credit cards for a balance to show up on your credit report every month.
“I have no idea where that myth originated, but it has been circulated widely in the last year or two,” Rod Griffin, director of public education at Experian, told me. “It is absolutely not true.”
Credit card companies typically report your balance to the credit bureaus once a month, usually at the end of each billing cycle. As a result, the balance that the card issuer reports is most likely your statement balance. That means the balance on your due date when you pay it off is irrelevant.
You may have also heard that you need to carry a balance to help your credit. Griffin debunks that theory as well.
“Ideally, you should pay your balances in full each month,” says Griffin. “The lower your balances are, the better it is for your credit scores. The only thing leaving a balance will do is cause you to pay interest on that balance. It will cost you money, but it won’t help your credit scores.”
What you can do: If you are able, pay your balance in full each month to avoid interest and get the benefits of a positive payment history.
2. Using credit cards to pay off other debt
This one’s a little tricky. In the right circumstances, using a balance transfer credit card with a 0% APR promotional period can be a great way to eliminate your high-interest debt from other cards faster.
But some lenders allow you to use a balance transfer to pay off other debts, including student loans, auto loans, and even mortgage loans—which could open you up to a potential disaster.
Credit cards typically carry higher interest rates than the average loan. Even if you’re confident you’ll pay off the debt within the 0% APR promotional period, something unexpected can come up and leave you paying more interest in the long run.
What you can do: Consider using balance transfers to pay off only high-interest credit card debt. Even then, pay off the balance as quickly as possible to avoid the interest trap again.
3. Running your balance too high
Even if you pay off your credit card balance on time every month, your credit could suffer. That’s because your credit utilization is a big factor in your credit score.
Credit utilization is calculated by dividing your balance by the card’s credit limit. So, a card with a $3,000 balance and a $6,000 limit has a credit utilization of 50%.
Your credit score also takes the average utilization of all your cards into consideration. So, if you have one card with a low utilization and another with a high utilization, your aggregate utilization could still be high, which can hurt your credit.
“Your credit report typically reflects the balance that shows on your credit card billing statement,” says Griffin. “Even if you pay it in full [by the due date], that could potentially represent high utilization for that month.”
What you can do: A good guideline is to keep your credit utilization below 30%. Set a balance alert to let you know when you’re getting close to that limit. Alternatively, you can make multiple payments on the card throughout the month to keep the balance low.
If you have some months with a high balance, however, don’t worry. “[It] generally doesn’t create a lasting effect on your credit scores if it only happens occasionally,” says Griffin. “Because it is temporary for most people…the scores will likely rebound quickly if there is a drop.”
4. Applying for the wrong card
Credit card companies can be picky about whose applications they approve. People with bad credit are at risk of defaulting on their credit card debt. As a result, most rewards credit cards are targeted to people with good or excellent credit.
If you apply for a card without knowing where your credit stands or what the card issuer requires, you might get denied.
Although a denial doesn’t hurt your credit, the credit inquiry that happens when you apply can knock a few points off your score. And if you keep applying and getting denied, those inquiries will compound and hurt your score even more.
What you can do: Always check your credit score before applying for a credit card. If your score is below 650, you might be better off applying for a secured credit card to help build your credit.
5. Neglecting to set a budget
Overspending is the biggest danger credit cards present. Unlike a debit card, a credit card doesn’t stop or penalize you once your checking account balance reaches zero.
If you use your credit card without a budget, you’re more likely to go into debt, which can cost you in interest.
Budgeting isn’t always fun or easy, but it’s the key to curbing your spending and living within your means. Take the time to review your average monthly expenses and work out a budget that takes your spending into account.
What you can do: Find out how much you take home each month and list out your expenses. Then, set spending goals for each category to keep you from spending more than you earn.
If you’ve already overspent and need to pay down some debt, consider a balance transfer credit card or personal loan to get a lower interest rate.
6. Ignoring your online account
“You can use your billing statement as a budgeting tool,” says Griffin. “It allows you to track your spending throughout the month.”
If you’re not checking your online account throughout the month, it’s hard to know how much you’re spending and where your money is going.
What’s more, your online account is usually the first place you’ll notice fraudulent activity. If you’re not checking it often, you could be giving an identity thief more time to use your credit card information.
What you can do: Check your online accounts throughout the month to make sure you know where your money is going. Keep an eye out for any charges you don’t remember making. If they were made by a swindler, you’ll be able to stop the fraud before it gets worse.
7. Paying an unnecessary annual fee
Annual fees aren’t inherently bad, but they’re not for everyone. On rewards credit cards, it’s important to know whether you’re earning enough rewards to make up for the fee. If not, you’re likely better off with a card with no annual fee.
What you can do: If you have a credit card with an annual fee, find out how much you’ve earned in rewards over the past year. Then, subtract the annual fee from that amount. If it’s low or negative, consider switching to a card without an annual fee.
Use your credit card responsibly
When you use a credit card responsibly, you can take advantage of perks and rewards while building credit without paying much in interest. But if you’re not careful, you could suffer the consequences of bad credit card habits for months or even years.
As you consider how you use credit, keep in mind how your actions might affect you both in the short term and down the road. For instance, your credit report displays the past 7–10 years of your financial history. If you made a big money mistake even a few years ago, it’ll take a while for that to go away—and meanwhile, potential creditors and potential landlords, among others, have access to that information.