While credit cards can be valuable financial tools that help you build good credit, they also have the potential to damage your finances if used unwisely.
Keep reading to learn how to avoid the three biggest credit card mistakes and to learn how to get savvy with your credit cards.
1. Signing up for retail credit cards for discounts
Imagine you are standing in the checkout line at Gap or Victoria’s Secret with a large pile of items. The cashier says you can save 40 percent off today’s purchase if you just apply for their store credit card.
We have all experienced this temptation. The saving will help offset the costs of our overspending, and there are often ongoing discounts on purchases for cardholders.
What is the catch? The APR on retail credit cards is sky high. If you carry a balance, expect to pay major interest – much more than you would on your regular credit card.
These cards offer a quick way to get in over your head with credit card debt, especially if you have cards for many different stores.
What to do:
Just say no and stick with your regular debit or credit card. Ask when the store is having their major sales so you can get good deals without needing the card.
Ask if there is a mailing list you can sign up for that will send coupons to your email or mailbox. Most major retailers offer a mailing list like this.
2. Applying for too many cards at once
Every time you apply for a credit card or any other form of credit, your credit report is checked by the creditor to determine your eligibility.
This is called a hard inquiry. It also happens when you apply for a mortgage, get a credit check for a cell phone or are getting your credit checked by a landlord.
An occasional hard inquiry is not a problem, but frequent hard inquiries can cause your credit score to go down because it signals that you are in need of credit. This makes you seem like you are a riskier customer.
When you see many credit cards with excellent introductory offers, such as 0% APR for one year or thousands of free airline miles, you may be tempted to apply for all of them.
Or maybe you are just worried you will be denied for credit, so you apply to several different cards at the same time to be safe.
“Too many applications
cause hard inquiries.”
What to do:
It is better to choose one single credit card that best meets your needs, apply for it and wait to see if you are approved.
If you are not, then move on to the next best card. Do not apply for too many at once because hard inquiries can add up.
3. Canceling cards too soon
The longevity of your lines of credit is a major factor of your credit score. The longer your lines of credit are open, the better.
On the other hand, having many brief lines of credit will hurt on your credit score.
Why? Creditors want to see you can responsibly handle credit over a long period of time.
Canceling any credit card can hurt you, but it will especially sting if you are closing multiple cards or if they have not been open very long.
People are often tempted to apply for credit cards with great promotions, and then they cancel them shortly after they get the reward. Or they might sign up for a retail card for a one-time discount and cancel it later.
This behavior can damage your credit.
What to do:
To help build a strong credit history, only apply for cards you want to use for the long term and keep them for as many years as you can, even if you do not plan to use them regularly.
Be sure to occasionally use this credit card from time to time to keep the line of credit looking active and in good standing.
Photo source: bp.blogspot.com.
Editorial Note: Opinions expressed here are the author's alone, not those of any bank, credit card issuer, airline or hotel chain, and have not been reviewed, approved or otherwise endorsed by any of these entities.