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Most people have a love-hate relationship with credit. We love that it’s easy, and always within reach. But we hate that it’s so easy to spend money we don’t necessarily have and that can get us into financial trouble.
Understanding what credit is, how we can use it to our advantage, and what major mistakes to avoid, can help us all in the long run. If you’re using credit properly, it’s great. If you’re abusing credit, or unknowingly using it improperly, then it can really hurt you.
Let’s take a look at 5 mistakes to avoid when you’re using credit.
1. Carrying a Credit Balance
Carrying too large of a credit balance can hurt you in a couple of ways.
First, when you borrow money, it costs you. Credit cards typically charge more than 20% on borrowed funds, other loans and lines of credit also charge interest on borrowed funds. People who use credit cards like bank accounts often end up paying a ton in interest charges.
Second has to do with utilization. Using too much of the credit available to you can actually lower your credit score. It’s recommended to only use about 40% of the credit available to you for long periods of time. Emergencies happen, and sometimes you need to max out a card to make a purchase. Just have a plan to pay it all back sooner than later. Paying your credit off right away is always a good habit.
2. Paying off the Wrong Debt First
When it comes to paying off credit debt, instead of looking at the amount remaining, look at interest rates.
In my experience people often look at the balance amounts when trying to understand how to pay off their debt. Should they pay off the smaller one, or bigger one first. But really people should be looking at what has the higher debt.
The higher the interest rate is on a loan, the more you will be charged for borrowing that money. If you’re looking to pay off your debt in the most efficient method, look at making extra payment towards your higher interest rate debt first, and then once it’s paid off move onto the next highest.
3. Only Making the Minimum Payments
Minimum payments are really misleading because if you only make the minimum payment it can take years or decades to pay off the debt. Making minimum payments makes you feel like you’re doing something, but you really aren’t.
The reason being is the minimum payments mostly only go towards the new interest charges for that debt. So you’re really just paying off what they are charging you, and your balance never actually decreases.
A good thing to start doing if you are paying off debt and can’t completely pay it off, is take the minimum and round up to the nearest $50, $100, or whatever makes the most sense for you. These extra payments might seem small, but they will end up making a big difference and save you interest charges.
4. Forgetting to Pay Bills on Time
The most annoying thing about forgetting to pay bills on time is the fact most of the time we have that money in our bank account, we just simply forget to do it. Not paying bills on time can impact your credit score, and cause you to be charged additional interest or fees.
You can simply write ‘pay my bills’ on your calendar every month, set up a recurring reminder on your computer or phone, or even set up automatic payments for bills that don’t change from month to month. Doing something super simple to make sure you do pay your bills can have ever lasting positive impacts on your credit score and budget moving forward.
Other articles you may enjoy:
- The Best and Worst Ways to Use Your Credit Cards
- What is a Financial Coach (and How to Find the Right One for You)
5. Closing Sources of Credit
As we talked about earlier, utilization can impact your credit score. So having credit that you never use can actually be a good thing. Especially if the card has no annual fees.
When someone cancels their credit card they are eliminating that credit available to them. Rather than cancel that card and eliminate that credit, you can simply store the card in a safe place and never use it. Credit is easy to get when you’re making money, and you can have it forever. If you end up canceling credit cards or lines of credit and your financial situation changes, it can be impossible to get it back. You could also look at increasing your credit, but just understand that you don’t need to spend up to your limit. It’s there, but you don’t need to use it.
About the Author
Winnipeg based Financial Advisor focusing on investments, financial planning, and mortgages. I prioritize education, because I believe the more we know, the more we all benefit. It allows me to help people make the most of their financial future.
Disclaimer: The information in this article is not intended to encourage any lifestyle changes without careful consideration and consultation with a qualified professional. This article is for reference purposes only, is generic in nature, is not intended as individual advice and is not financial or legal advice.