There are five common mistakes that millennials often make with credit cards, mistakes that could greatly affect their credit scores and future financial situations. In this U.S. News article, Gregory Go highlights some of the biggest credit card mistakes, with tips on how to avoid them.
Carrying balances and paying just the minimum. A common belief is that to build a positive credit rating, you have to get a credit card and also carry a balance from month to month. The problem, however, is that credit cards designed for new cardholders generally carry high APRs – as high as 25 percent. If you carry a balance from month to month and only pay your minimum monthly payment due, you are paying considerable cash in interest on purchases, which can potentially create a mountain of debt you can’t pay down. Build your credit rating and save on interest by paying your balance in full each month, instead.
Maxing out credit lines. A new line of credit can be exciting and provide an opportunity to make a large purchase you’ve had your eye on for a while. At first, it can seem like a simple plan – make the purchase and slowly pay it off. Maxing out credit lines, however, can signal to creditors that you’re at risk of defaulting on your balances. Spending too much or maxing out your credit lines also affects your utilization ratio, an important factor in your credit score. Utilization ratio is the percentage of the total available credit the cardholder has used, and a high ratio indicates a higher credit risk. It is often recommended that you keep your total debt-to-credit ratio below 30 percent, which means you may have to put off that large purchase you’ve been dreaming of for a bit longer.
Not taking due dates seriously. Although it’s common for most companies, such as your cellphone provider, to impose late fees when a payment is late, ignoring due dates on credit cards can become far costlier. Late payments not only significantly affect your credit rating but usually come with late fees as well as penalty APRs. One late payment can end up in an APR that’s well over 20 percent. That penalty APR combined with a late fee of approximately $30 (and the effect on your credit rating) can cost you hundreds – even thousands – in the end.
