pitfalls to avoid

conquering credit & credit cards

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what's in this lesson?

People make mistakes all the time when it comes to using their credit card. Unfortunately, those mistakes can have a pretty significant negative impact. Do you know how to manage credit card APR? In this lesson, we identify some of the most common pitfalls to help you avoid them.

pitfalls to avoid

conquering credit & credit cards

Share

Share on facebook
Share on twitter
Share on linkedin
Share on email

what's in this lesson?

People make mistakes all the time when it comes to using their credit card. Unfortunately, those mistakes can have a pretty significant negative impact. Do you know how to manage credit card APR? In this lesson, we identify some of the most common pitfalls to help you avoid them.

pitfalls to avoid

conquering credit & credit cards

People make mistakes all the time when it comes to using their credit card. Unfortunately, those mistakes can have a pretty significant negative impact. Do you know how to manage credit card APR? In this lesson, we identify some of the most common pitfalls to help you avoid them.

overview

Pitfall 1: Not getting a credit card in the first place

 

  • A lot of people think that they are fine with just their debit card and don’t understand the difference between a debit card and a credit card.

 

  • With many debit cards, there are minimal benefits – both in terms of building credit and for getting cashback/rewards. While the most important reason you need a credit card early on in life is to build credit, there are a lot of other amazing benefits to different types of credit cards, too. Get a credit card, and start as soon as you can!

 


Pitfall 2: The 30% rule

 

  • You get a credit limit, which is the maximum amount you can spend in a month. For example, if your limit is $500, you won’t be able to spend more than that on your credit card. But, you’ll want to keep it lower anyway, here’s why: The 30% rule means you don’t want to spend more than 30% of what your credit limit is. That’s because one thing the credit companies are assessing is your ability to pay back what you borrowed. They generally use your credit utilization ratio (defined in the previous lesson) to determine your ability to pay back what you borrowed. The lower you keep what you borrow overall, the less risk the credit companies think there is that you won’t pay it back.

 

  • But, if you’re wondering how to improve your credit score, if you continue to pay your credit card bill on time and in full, the benefits will compound themselves, including your credit score going up, your, credit limit on your current card going up over time, and your ability to get higher limit credit cards in the future.

 


Pitfall 3: Not paying balance in full

 

  • Do your best to pay your balance in full every month! As we mentioned in the last lesson, you have a minimum payment and a statement balance. You want to do your best to pay your statement balance on time, which is the amount you spent during the past month-long period. If you can’t pay it, you must at least pay your minimum payment to avoid huge penalties.

 

  • But, if you only pay your minimum payment, or any amount less than your statement balance, you’ll be penalized, as well. That’s where credit card APR comes in.

 

  • Credit card APR (defined in the “terms to know” lesson) is the interest you have to pay on your unpaid balance, and that rate can get pretty high, meaning your penalty fee will be high as well. Be sure to pay off as much of your balance as you can each month – it helps you avoid paying more and also will continue to build your good credit.

 


Pitfall 4: Maxing out credit cards

 

  • Do your best to avoid maxing out your credit cards. For the same reason you don’t want to go over 30% of your credit limit on a card, you definitely want to avoid maxing out your cards.

 

  • Generally, the more you spend, the higher your credit utilization ratio (defined in the previous lesson) goes. When your credit utilization ratio goes up, credit card companies recognize this and may decrease your credit. If you’re maxing out your cards, your utilization ratio is going up.

 

  • While it’s definitely not ideal, everyone has different financial situations. If you do need to max out your credit card, it’s always possible to build your credit back up in the future.

 


Pitfall 5: Canceling unused credit cards

 

  • There can be a lot of confusion around this one. Generally, having credit card accounts open increases the amount of credit you have available as a whole. So, even if you aren’t using a credit card very much, spending a small amount just so you can pay it off is more beneficial to you than spending nothing at all against the card.

 

  • If you cancel the card, that means your overall available credit becomes less, so the importance of paying off and spending less of the credit you have available elsewhere becomes even more important. That’s why it can generally be better to keep a credit card you’re not spending much on than to cancel it entirely.

 

If you follow some of these rules and avoid these pitfalls, you’ll be on your way to building good credit!

 

Source(s): Money Under 30, CNBC

How's it going?

resources

overview

Pitfall 1: Not getting a credit card in the first place

 

  • A lot of people think that they are fine with just their debit card and don’t understand the difference between a debit card and a credit card.

 

  • With many debit cards, there are minimal benefits – both in terms of building credit and for getting cashback/rewards. While the most important reason you need a credit card early on in life is to build credit, there are a lot of other amazing benefits to different types of credit cards, too. Get a credit card, and start as soon as you can!

 


Pitfall 2: The 30% rule

 

  • You get a credit limit, which is the maximum amount you can spend in a month. For example, if your limit is $500, you won’t be able to spend more than that on your credit card. But, you’ll want to keep it lower anyway, here’s why: The 30% rule means you don’t want to spend more than 30% of what your credit limit is. That’s because one thing the credit companies are assessing is your ability to pay back what you borrowed. They generally use your credit utilization ratio (defined in the previous lesson) to determine your ability to pay back what you borrowed. The lower you keep what you borrow overall, the less risk the credit companies think there is that you won’t pay it back.

 

  • But, if you’re wondering how to improve your credit score, if you continue to pay your credit card bill on time and in full, the benefits will compound themselves, including your credit score going up, your, credit limit on your current card going up over time, and your ability to get higher limit credit cards in the future.

 


Pitfall 3: Not paying balance in full

 

  • Do your best to pay your balance in full every month! As we mentioned in the last lesson, you have a minimum payment and a statement balance. You want to do your best to pay your statement balance on time, which is the amount you spent during the past month-long period. If you can’t pay it, you must at least pay your minimum payment to avoid huge penalties.

 

  • But, if you only pay your minimum payment, or any amount less than your statement balance, you’ll be penalized, as well. That’s where credit card APR comes in.

 

  • Credit card APR (defined in the “terms to know” lesson) is the interest you have to pay on your unpaid balance, and that rate can get pretty high, meaning your penalty fee will be high as well. Be sure to pay off as much of your balance as you can each month – it helps you avoid paying more and also will continue to build your good credit.

 


Pitfall 4: Maxing out credit cards

 

  • Do your best to avoid maxing out your credit cards. For the same reason you don’t want to go over 30% of your credit limit on a card, you definitely want to avoid maxing out your cards.

 

  • Generally, the more you spend, the higher your credit utilization ratio (defined in the previous lesson) goes. When your credit utilization ratio goes up, credit card companies recognize this and may decrease your credit. If you’re maxing out your cards, your utilization ratio is going up.

 

  • While it’s definitely not ideal, everyone has different financial situations. If you do need to max out your credit card, it’s always possible to build your credit back up in the future.

 


Pitfall 5: Canceling unused credit cards

 

  • There can be a lot of confusion around this one. Generally, having credit card accounts open increases the amount of credit you have available as a whole. So, even if you aren’t using a credit card very much, spending a small amount just so you can pay it off is more beneficial to you than spending nothing at all against the card.

 

  • If you cancel the card, that means your overall available credit becomes less, so the importance of paying off and spending less of the credit you have available elsewhere becomes even more important. That’s why it can generally be better to keep a credit card you’re not spending much on than to cancel it entirely.

 

If you follow some of these rules and avoid these pitfalls, you’ll be on your way to building good credit!

 

Source(s): Money Under 30, CNBC

Lessons in this course:

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