Truth: Credit cards can be effective credit-building tools. When used properly, your credit card accounts can help to populate your credit reports with positive account information, which is valuable for your credit scores indeed. But, if used improperly, even abused, credit cards can destroy your credit and hurt your wallet.
Bad habits with credit cards translate to excessively high interest rates and the potential for lower credit scores.
A recent survey by LendEDU, dubbed "Millennials and Credit Cards," uncovered some rather disturbing findings. Are you guilty of any of these credit card-related bad habits? If you are and before you shrug them off, know that bad habits with credit cards translate to excessively high interest rates and the potential for lower credit scores. Let’s explore – both the habits and ways to do an about-face.
1. Underestimating the Consequences of a Late Payment
Nearly 78 percent of those surveyed understood that making late payments on credit cards could lower their credit scores. White it’s great that a majority understood this fact, the survey also revealed that a startling 17.48 percent thought late payments would not impact their credit scores. And shockingly, 5.59 percent believed that late payments would actually improve their credit scores.
The truth is that a late payment on a credit card account, or any other account, for that matter, has the potential to harm your credit scores. Further, there is no scenario where a late payment can improve your scores. Roughly one-third of the points in your FICO and VantageScore credit scores are based on the presence or lack of negative information (including late payments) that appear on your credit reports.
2. Rolling Balances from One Month to the Next
Credit cards work best when you pay them in full each month. In fact, FICO and VantageScore’s models are designed to assign fewer credit score points whenever you rack up balances on your credit card accounts that are too close to the credit limits. This is true even if you make your monthly payments on time. Paying off a card in full can not only save you from spending extra money on interest fees, but can also ensure higher credit scores.
Unfortunately, the survey discovered that a lot of people didn't know that rolling an outstanding credit card balance from month to month was a bad thing. (Or, if they did understand, then perhaps they did not care.) Around 48 percent of those surveyed stated that they often carry credit card balances over from one month to the next. With an average APR on credit cards hovering around 17 percent, that makes their credit debt likely the most expensive debt they’ll ever service.
3. Being Afraid of Credit Cards
Approximately 41 percent of survey participants answered that they would "consider the thought of using a credit card a scary thing." This is a common sentiment among consumers, perhaps yourself included. Yet the failure to recognize credit cards for the powerful tool they can be can be a destructive mistake.
When you use credit cards correctly, only charging what you can afford to pay off each month and keeping your payments on time, credit scoring models are designed to reward you.
When you use credit cards correctly, only charging what you can afford to pay off each month and keeping your payments on time, credit scoring models are designed to reward you. In fact, you could open a credit card account, use it and pay it off in full each month and never pay a dime in interest. All the while you’d be earning rewards, assuming your card has a rewards program. And, your credit scores will reward you for the responsible usage.
You should not be scared to use credit card accounts. In fact, you shouldn’t be scared of any form of credit. Properly managing credit is much easier than you may think. Use credit sparingly, and only when you actually need it. Don’t get overextended. And, make your payments on time, every time. If you’ll follow those simple rules, you’ll end up with fantastic credit scores and the lowest interest rates on the market.