You wouldn't drive a car for the first time without a lot of lessons first. Likewise, you probably wouldn't bake a cake for the first time ever without a recipe. A lot of people, however, start using credit cards without learning anything about them.
Which can lead to mistakes. A lot of mistakes, if you don't learn how to use credit cards properly.
So if you're new to the world of credit cards, or you've used them for years but are deep in debt and wondering where you went wrong, we're going to take a look at the worst things you can do with your credit cards in a few key areas: fraud and identity theft, your credit score and your budget.
Protect your credit cards from fraud and identity theft
Just as you wouldn't drive a car without lessons and a license, it's not a great idea to leave a purse or wallet stuffed with cash on your dashboard. It's like offering an invitation to a passing-by burglar to ransack your car.
Well, a lot of cardholders do the equivalent with credit cards. For instance, some of the worst things you can do with your credit cards include…
Never looking at your credit card statements
What's the harm, and why is that so bad? You could be missing fraudulent charges. If a thief has gotten hold of your card and made an unusually large purchase or made one in a place or with a website that is unusual to your credit usage, your credit card company will likely notice and contact you. On the other hand, if the thief instead uses your card for run-of-the-mill everyday purchases that don't raise any red flags, you're only going to notice by taking a look at your statement.
You should definitely be monitoring your credit card at least once a month, and if you use it a lot, probably far more, just to make sure you're on top of things.
Staying on top of your statements means that, in addition to possibly discovering a crook, you may also notice that some service you signed up for weeks or months ago and thought was just a one-time charge is actually a monthly charge. Maybe you'll notice that, "Wow, even though I signed up for a gym two years ago, I don't use it," and then you'll either start using it, or you'll finally end the membership. If you want to stay on top of your finances, you'll take a good look at your monthly financial statements and respond accordingly.
Not protecting your credit card numbers
That is, you toss paper financial statements in the trash without shredding or ripping them up. You fail to protect your devices and computers with anti-virus software, so a hacker gets into your laptop one day and finds all of your financial information. A phone call from the "electric company" or "doctor's office" convinces you to pay a bill, but the call is actually just a crook posing as a legitimate business. You loan your card to a friend for a one-time purchase only to find that friend left it lying around.
It's one thing to make the phone call to a doctor's office and then pay a bill over the phone - but when callers call you, if you're going to make a payment, you want to be very careful about giving out your credit card number.
While credit cards do offer more security than cash, you should still treat them as cash in the way that you protect them.
Not paying attention to websites that you're shopping with
This is a subset of not protecting your credit card numbers. You absolutely must make sure you're on a secure, encrypted website before you key in your credit card number. Secure websites have encryption software designed to prevent identity theft. When you're on a secure website, you'll see a lock icon in your browser's address bar and "https://" in the URL. Note the "s" at the end of "http."
On a related note, save your online shopping and logging into your credit card and banking accounts for when you're on a private Wi-Fi network. Enjoy your coffee and a good book at Starbucks -- don't use the public Wi-Fi to do your banking.
Understand how your credit card affects your credit score
There are, unfortunately, a lot of missteps that you can make with a credit card that can destroy your credit score. It's funny how that works. Credit cards are among the fastest ways to improve your credit score, but if you don't use them well, they are also the fastest and most efficient way to send your credit score plummeting to the depths of the earth.
Some of the worst things you can do with your credit cards as it relates to your credit score include …
Not paying your credit card bill
No need to spend much time on this. It's obvious. You aren't shocked. If you borrow money on a credit card, you need to pay it back, even if you can't pay it back in full all at once. You can't just ignore it. If you don't pay at all, eventually, your credit score will swiftly begin to drop. You'll also be on the hook for late fees, and your interest rate will likely go up, putting you even further in debt. But if you aren't making payments, maybe those are moot points.
Paying your credit card bill late
Is your credit score going to be destroyed if you're a day late? No - and it won't be reported to the credit bureaus. That happens when you're around 30 days late. So, phew.
That said, all does not exactly end well. You could see your interest rate climb, making revolving debt more expensive, and you'll likely owe a late fee. Now, you may not. Some credit cards will give you a pass on that very first late payment. But, generally, paying a credit card bill late is going to hurt you financially. Even if you only make the minimum payment due, just do it.
Carrying revolving debt
This is also a terrible, terrible, terrible thing to do - all the time.
Revolving debt is a term referring to debt that you carry on your credit card month after month. Instead of paying off what you owe every month, it's September, and you're still paying off something you bought in January. That's revolving debt.
And, look, if every once in awhile, you carry some revolving debt, don't beat yourself up too much. If you took on more than you could pay off in a month, but it helped your cash flow and got your electric bill paid, then your credit card helped you and everything worked out fine as long as you pay that debt off in full as soon as possible (and, no, the minimum payment amount will NOT get you out of debt quickly).
But if you're carrying revolving debt all the time, then you're paying interest on that revolving debt. That gets expensive. And, yes, credit bureaus notice that you're carrying this revolving debt, and that can hurt your credit score.
How much it will hurt is hard to say. It often depends on how much revolving debt you're carrying. If your credit card is maxed out, and you're continually carrying revolving debt, it isn't going to look good to a credit bureau.
Spend all the way up to your credit card limit
Maxing out your credit card is another big no-no. It's definitely up there on one of the worst things you can do. It isn't like not paying your credit card, or constantly being late with payments, but it's bad.
There are a couple of issues here, with piling up debt being the obvious problem. But maxing out your cards also has the potential to negatively impact your credit score. Part of your FICO score calculation is tied to your credit utilization ratio. This refers to the balance on your credit cards compared to the amount of available credit you have left on your cards. Max out your cards, and your utilization ratio goes up. This scenario usually results in your credit score going down.
Experts suggest you carry no more than 30% of your available credit - and some suggest owing no more than 10% of your available credit.
Look, if you're often getting up to 80% or 90% of your available credit, but you're paying off your debt every single month without fail, your credit score probably won't tank (but it probably will not be quite as high as it could be). But if you're always at 80% or 90% of your available credit - and you're carrying revolving debt with no end in sight - that's where you're going to see your credit score fall.
It might sound hard to stay at 30% or below for your available credit, but if you aren't having trouble paying off your credit cards, maybe you should apply for more available credit - and then you can spend a little more a month without it hurting your credit score.
Applying for lots of credit cards at once
It's not the best idea. For starters, multiple applications for credit in a short timespan can raise red flags. Why? Opening several credit accounts in a short amount of time signals you might be in dire straits and need money fast, making you appear a greater risk to lenders, especially for people who don't have a lengthy credit history. Lenders fear you're about to go on the biggest shopping spree ever (or maybe already have) and may not be the best steward of money. After all, credit cards are a form of borrowing, and they want to lend money to responsible borrowers.
Furthermore, most credit card applications involve a "hard pull" on your credit; that is, banks take a look at your credit as part of the process to approve your application and each time a lender looks at your credit in this way, it records as a "credit check" or hard pull. Too many "hits" to your credit score can limit your ability to get good rates on home and auto loans down the road, not to mention a new credit card.
Instead of applying for every card you see, comparison shop for the best credit card that is most likely to suit your needs. When you get that card, use it responsibly before you consider applying for another credit card.
Too many department store cards
One of the subtlest items influencing your credit score is the department store credit card. These are not considered as desirable as major bank credit cards, possibly because the barrier to getting one is generally pretty low. Plus, the interest rates can be quite high, and you end up with few rewards. Even if you apply for one to get a promotional discount, it can be trouble - because paying off the account and then canceling the card can ding your credit score, since you are reducing your available credit.
Furthermore, they generally have fairly low credit limits, which means that even a little bit of spending can mean you're using a significant percentage of your available credit and, therefore, driving up your credit utilization ratio.
None of this is to say you shouldn't get any department store credit cards. Carefully consider why you are getting the card and think about how often you shop at the store. If you are a loyal customer, and the rewards are worth it, you might be OK. But avoid filling your wallet with department store and retailer cards.
Making only the minimum payment
As you hopefully are already aware, one of the biggest credit card mistakes you can make is paying only the minimum payment. The minimum payment is designed to seem affordable to you, while providing the credit card issuer with a longest possible amount of time for you to be making payments. If you only make the minimum payment, it will take you years to pay off your credit card debt, and you could pay three or four times what you originally borrowed.
Fortunately, credit card statements generally spell that out for you - but you don't want to fall into some mindless trance where every month that goes by, you keep paying the minimum payment and stop noticing that you're in a hole that you're not close to getting out of.
Understanding credit cards and your budget
Credit cards can be an excellent tool in your financial toolbox. If you have a rewards credit card, and you're paying it off every month, you're getting cash back - or compiling miles and points that you'll trade in later for something valuable. If your credit score is high, and you're being given low interest rates on loans you take out, for your car or student loans or a house, you're saving money, which helps your budget.
But use them badly, and you can really blow up your budget.
When it comes to your budget, some of the worst things you can do with credit cards include…
Co-signing someone else's credit card
The Credit CARD Act of 2009 means that your children can't get credit cards without adequate income until they are 21 -- unless they have a co-signer. Or you might have a friend or relative who wants you to co-sign.
You may be honored. After all, you have this wonderful credit score, and you can help a family member or friend get a credit card. If you really care about the person, you naturally want to say, "Well, sure. Let's do it."
But let's don't. Unfortunately, co-signing for a credit card - even your adult child's - is often a big mistake. Not only are you responsible for the balance they run up, but your credit score could also take a plunge if the balance is enough to increase your credit utilization percentage or if they're late paying the credit card bill.
It can be done, of course, without bad things happening. You may have a relationship with an adult child in which you know that things are going to work out, and maybe you're pretty wealthy, and you know you can make payments if your kid has trouble. But if you are not in that position of being wealthy, you really want to be careful here. Use your imagination. So much can go wrong.
Carrying revolving debt
"Wait," you may be thinking. "Didn't you write about that earlier, several paragraphs ago?"
But revolving debt can really hurt not just your credit score but your budget, too. We're talking, again, heavy revolving debt that you simply can't pay off right away. If you have some revolving debt, and you're confident that in a month or two you'll have it paid off, then don't sweat it. (Not a good practice, of course, but life happens.) If you're carrying revolving debt month after month, however, the interest you're paying is any rewards you're earning basically worthless.
The longer you can go without carrying revolving debt, the better off you are. The only exception is if you get a credit card with an 0% intro period during which you can buy something and pay no interest during the first 12, 15 or 18 months or whatever time you're given. Then, sure, carry that revolving debt, if you must. (It's still better to pay it off as soon as you can and you definitely want to have a plan in place to pay it off before that intro period ends).
Using a balance transfer credit card improperly
The right way to use a balance transfer credit card? You transfer a lot of debt onto a credit card that allows you have six to 18 months to pay off a debt - with no interest. You pay it off within that time period, and you continue to use your credit card responsibly.
The wrong way to use a balance transfer credit card? You transfer a lot of debt onto that balance transfer credit card - and you don't pay it off in time. So you still have a lot of interest. Meanwhile, that other credit card that no longer has any debt on it? Now it has debt. You maxed that out, and so now you're carrying a lot of debt that you can't pay off on two credit cards. At this point, you're probably so deep in debt that you won't be able to apply for any more balance transfer credit cards.
Applying for a credit card when you're having trouble paying off the one you already have
This is kind of a cousin to the "balance transfer credit card" mistake. If you're struggling to meet your credit card payments, applying for a credit card may sound like a good idea. You'll put money on that credit card, and your cash flow problems will be solved. It really won't. You've probably made things worse. Instead of having trouble paying off one credit card, you're going to soon have trouble paying two off.
That'll hurt your budget and your credit score.
Perhaps it goes without saying, but don't then fall into the trap of applying for a third credit card when you're having trouble paying off the two other cards you have. You're deep in debt. You're panicked. You find a company willing to give you another credit card, and so you take it. But because you're struggling, now instead of having trouble paying off two credit cards, it's an even bigger challenge to pay off three.
Use the credit card; don't let it use you
The key with a credit card is to use the tool and not let the "tail wag the dog," if you will. Just because you have $10,000 worth of credit doesn't actually mean you can afford to spend $10,000 in a given month.
Make a budget and stick to it, regardless of what your credit card issuer says you're allowed to spend. If you stay within your budget, a lot of the points above won't be concerns for you at all.