Young adults often get into trouble the first time they use credit cards, but you don’t need to be one of them.
Your first credit card has the potential to open up a whole new world of financial opportunities — or to sink you in some serious money problems. It all depends on how you use it.
For young adults, that can be tricky. It’s not like credit cards come with a list of dos and don’ts, and it’s not a subject you learn much about in school either. The result is often a trial by fire where first-timers rack up debt and build a poor credit history.
But that doesn’t need to happen to you. If you avoid these five common mistakes, you’ll get all the benefits that come with credit cards without any of the potential drawbacks.
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1. Paying the minimum
On your credit card statement, you’ll have multiple payment options. There’s the minimum payment, also referred to as the amount due. This is the smallest amount you can pay without incurring a late fee.
There’s also the statement balance, which is the total amount you owe. If you pay this amount in full, you won’t pay any interest charges, so this should be your goal every month.
Don’t fall into the trap of making minimum payments. If you only pay the minimum, it could take years to pay off your balance, and a large portion of what you pay will be interest charges.
2. Maxing out the card
You might think that if a credit card company gave you a certain credit limit, there’s nothing wrong with using it.
Technically, that’s true, but it’s a bad idea. If you max out your credit card, you’ll probably have a difficult time paying it off. You’ll also have a high credit utilization ratio. This ratio is the amount of your available credit that you’re using, and it’s an important factor used to calculate your credit score.
If you have one credit card and you max it out, you’ll have a credit utilization of 100%. That will have a big impact on your credit score because it’s recommended that you don’t use more than 20% to 30% of your available credit at any given time.
3. Using it for luxuries you can’t afford
One danger with credit cards is the way they can tempt you to make purchases you wouldn’t if you were paying in cash. Instead of telling yourself “I can’t afford that,” you think “I can put that on my credit card and pay it back later.”
Before you do that, consider this — Americans’ average credit card debt was $5,736 at the end of 2018. Most of those consumers didn’t get there by deciding to charge a few thousand dollars in a single day. They had that same idea of paying back the purchases they couldn’t afford later, and all it did was get them into expensive debt.
4. Applying for multiple cards
When you see all the different bonuses credit card companies are offering, it’s tempting to apply for whichever cards catch your eye. Although applying for multiple cards can be a good strategy, you shouldn’t jump into it straight away.
With multiple credit cards, you’re more likely to overspend or miss a payment and get a late fee. It can also hurt your credit if you apply for too many credit cards. Each application will cause a hard credit inquiry, which has a small impact on your credit score. The average age of your credit accounts is also a factor, and this will decrease every time you open a new card.
As the saying goes, you have to learn to walk before you can run. Spend at least a year using just one credit card before you think about getting more.
5. Canceling a card
Here’s another situation where something that seems logical can get you into trouble. If you don’t need a credit card anymore, you should cancel it, right?
Not exactly. Since the age of your credit accounts affects your credit score, it’s better to keep older accounts open. It’s also good to keep cards open because you’ll have more available credit, which helps you maintain a lower credit utilization ratio.
What if the card you’re not using has an annual fee? In that case, you can try downgrading it first by calling the card issuer and asking to switch it to a no-annual-fee card. If you can’t, then you should cancel the card to save money.
Staying safe with your first credit card
It’s not hard to find people with credit card horror stories that they spent years recovering from. That’s why it’s so important to understand how this happens so that you don’t end up going down the same path.
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