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Credit cards aren’t just a convenient way to make payments and pocket rewards – they also play a pivotal role in formulating your credit score.
Next to your income, your credit score is one of the most important determinants of your financial life and can affect your chances of being approved for everything from car loans and rental applications to a mortgage (not to mention, what interest rate you would pay).
The higher your credit score, the more lenders such as banks will trust you with money (and vice versa). So, with that in mind, here’s a breakdown of the top credit card mistakes to avoid in order to maintain good credit.
While rarely advertised as such, credit cards are essentially short-term loans. Every time you use plastic to pay for something, you’re using borrowed money to foot the bill — money that you’ll have to pay back within a specific timeframe.
How reliable you are at paying back what you owe on your credit card has a direct impact on your creditworthiness. In fact, estimates suggest that your payment history accounts for 35% of your total credit score, making it the single most important determining factor.
In the case of most credit cards, you’ll be issued a statement every month indicating the balance you owe, the date you must pay it off by, as well as a minimum required payment. The best course of action is to always pay off your entire balance by the due date. That way, you’ll develop a positive payment history while also avoiding any interest charges. If paying off your full balance isn’t an option, you should at least make the minimum payment on time. Keeping aware of your monthly credit card statement is crucial, so schedule recurring email notifications and calendar updates to ensure you’re never out of the loop on when your bill is due.
Closing Your First Credit Card
Your first credit card and the length of your credit history are closely intertwined. Consequently, cancelling your first card can negatively impact your credit history, and by extension, your credit score.
A longer credit history provides lenders with the ability to more accurately assess your creditworthiness and it’s been estimated that your credit history accounts for 15% of your credit score. Therefore, it’s recommended that you never cancel your first card, even if you don’t use it as regularly as you once did.
Not Tracking Your Spending
If you carry a travel credit card or cash back credit card, it can be easy to justify using plastic for everything. After all, you’ll earn rewards back on your spending that you can use to bankroll a future vacation or build up savings. And while that can be a great strategy if you have the wherewithal to pay off your balance every month, it can prove detrimental if you lose track of your spending, end up buying more than you can afford and carrying over a large balance from one month to the next.
Aside from being hit with costly interest charges, carrying credit card debt can affect your credit utilization rate. Credit utilization refers to how much money you owe relative to how much you can borrow, and odds are, your utilization rate is high if you’re regularly carrying a balance. That can spell bad news for your credit score.
So, make sure you continuously monitor your credit card spending through either a spreadsheet or an app and set a budget to avoid overspending.
Maximizing your Credit Card
Keeping track of your spending is key to avoiding overspending, but can also help ensure you don’t hit the upper limits of your card’s credit limit. Similar to credit card debt, maxing out your credit card can increase your credit utilization rate and signal that you’re borrowing too much and are overleveraged.
If you manage your everyday spending and pay off your bill consistently yet still regularly come close to maxing out your card, it may be time to ask for a credit limit increase. On the other hand, if you have a number of big-ticket purchases to make — such as new furniture — and are worried you’ll temporarily go over your card’s credit limit, consider paying off your balance early even before you receive your statement in the mail.
Avoiding Credit Cards Altogether
Without a credit card to your name, your credit score and your chances of being approved for a new loan can potentially take a dip.
A credit card that’s paid off regularly provides lenders (such as banks) with proof that you can be trusted with money. The longer you possess your credit card and use it responsibly, the higher your credit score will be. A credit card can also help to diversify what is known as your “credit mix”, which shows lenders that you can manage multiple types of loans at once and increases the likelihood that they’ll trust you with another – such as a first-time mortgage.
If you’ve avoided credit cards thus far from fear of overspending, you can ask for a low limit to put a ceiling on your purchasing power or opt for a low-interest credit card to use only in cases of emergencies. Regardless of your thoughts on credit cards, make sure to read reviews and compare your options to maximize your chances of picking up one of the best credit cards in Canada.
Applying for Too Many Credit Cards at the Same Time
Every time you apply for a credit card, you’re giving a card issuer permission to make an inquiry into your credit report. While these inquiries tend to impact your credit score in the short term and only by a few points, applying for multiple cards simultaneously can cause a bigger than normal hit to your score. Multiple card inquiries can also signal to lenders that you’re in a frantic search for new credit – further dinging your credit score.
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