Your credit score is important for all aspects of your financial life. A good score makes it easier to rent an apartment, borrow at an affordable rate, and qualify for utilities and cell phone service with a reasonable deposit.
Credit cards can help build your credit score, but they can also ruin your credit if you don’t use them wisely. To ensure that using your card doesn’t damage your score, you should make sure to avoid these four big credit card mistakes.
1. Not making payments on time
If you miss a credit card payment, it can significantly hurt your credit score. Your payment history is the most important factor in the credit score formula and even one late payment can cause it to drop.
Card issuers generally don’t report a late payment until you’re 30 days or more overdue. You can ensure this doesn’t happen by tracking your payment schedule on a calendar, setting reminders, or setting up automatic payment.
2. Maximize your credit cards
Although payment history is the most important to your credit score, credit usage comes next. Your credit utilization rate is calculated by dividing the amount of credit used by the amount of credit granted to you. If you charged $1,000 to your card and you have a limit of $4,000, you would divide $1,000 by $4,000 to find a utilization rate of 0.25 or 25%.
A lower utilization rate is better and will earn you a better credit score. It is imperative to keep your credit utilization below 30% of available credit, as anything above this threshold is considered too high and hurts your credit score.
3. Open too many cards at once
Other factors that affect your credit include the number of inquiries and the average age of all your credit accounts collectively.
Inquiries are posted to your credit report after you apply for a new credit card or other type of loan, and each inquiry stays on your credit report for a period of two years. Too many is a red flag that hurts your credit score because it suggests you can’t control your borrowing. And the average credit age, of course, is determined by the age of all your accounts.
If you open a new credit card, you get a survey and reduce your credit age. This is why you want to avoid opening too many cards at once, as this can hurt your score in two ways.
4. Close old cards you no longer use
Finally, closing old cards is another big mistake to avoid. By closing open accounts, you reduce the credit you have. As you read above, this means that your usage rate increases since closing your old unused account will not reduce the amount of credit you have used. Closing the old account could also eliminate the positive payment history on the account and reduce the average age of your account.
Fortunately, each of these mistakes is easy to avoid if you pay your bills on time, don’t open too many accounts, don’t close old ones, and don’t overcharge.
Check out The Ascent’s best credit cards for 2022
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