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Five Ways You’re Using Your Credit Card Incorrectly

by Magical Credit

In an era that demands speed and efficiency, the credit card has become a wallet staple. People don’t typically carry cash and coins around anymore – they’re clunky, easy to lose, and forgetting them in the wash is depressing.

Despite how common credit cards are, it’s shocking how many consumers don’t know how to use a credit card.

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Sure, coming up with shrewd ways to bank on rewards, or obsessing over the idea that you’re ‘building good credit score’ (a lot of people fail at this, too) are strong habits to uphold when owning a credit card. But in doing so, it’s easy to tunnel vision towards those goals, while unknowingly doing a lot wrong when using your plastic. Credit is a potent tool to build up your finances. To do so correctly, these credit card tips will help you recognize credit card misuse and kick it from your routine:

1. Carrying a Balance to Help Your Good Credit Score.

This is one of the most common misunderstandings when owning a credit card. Many credit card owners think that carrying a balance will help their good credit score, when in fact, it really does nothing besides cost you more money.

Carrying a balance is akin to telling a credit card company, ‘Hey, take my hard-earned cash.’ You’re losing money via interest payments if you carry a balance. If it’s possible, the ideal practice is to pay the balance in full every month. So what leads to good credit? Just owning a credit card. Carrying a balance has nothing to do with how to increase credit score. In fact, having credit available and NOT spending every last dollar (especially when you can’t afford to pay it back) is the key to good credit. This shows creditors that you have restraint when comes to your finances.

2. Discarding Cards You Don’t Use.

Carrying a ton of cards will naturally overburden your wallet. Eventually, you’ll probably purge your bulging wallet, eradicating any cards you rarely use or have quit using altogether. It’s standard to just dump them in the trash; this is a huge mistake.

When you close a credit card, it damages your credit score, even if the card has been dormant for ages. It affects your utilization ratio (which is simply your total debt balance divided by your total available credit, across all cards you own), as you’re diminishing the total credit you’ve been extended. The age of your accounts will also be lessened, and that influences 15% of your credit score right there.

Rather than banishing your credits cards into the abyss of a messy drawer, keep them within reach so you can use them every once in a while. This way, they won’t close from inactivity and you’ll maintain a higher overall credit allotment. Of course, if you’re paying an insanely high annual fee for that credit card, it may be wise to shut it down; or simply stop using it and store it somewhere safe

3. Maxing Out Your Credit Card.

Simply put, maxing your credit card to its limit hurts your credit score.

This principle comes back to the utilization ratio, which again, is the amount you spend versus the amount of credit you’re allotted. Lenders want to see responsible usage of your card; just because you have a certain amount to spend, doesn’t mean you need to hit that ceiling every month.

A 1-to-1 spending-credit ratio looks bad on spenders, which correlates to damaging a good credit score. Generally, if you can keep your spending to under 30% of your limit, you’re in fantastic shape.

4. You’re Abusing Cards for Discounts.

To be clear, this is different than cashing in on credit card rewards (this is something you should be doing).

You’ve probably seen retailers advertising amazing deals if you open a line of credit with their store. Keep in mind most deals are one-shot, on-your-immediate-purchase deals, which you could really end up paying for in the long run.

Retailers skew towards very high interest rates – over 20% isn’t out of the realm – which negates those ‘crazy savings’ when you signed up for a card. So if you can’t pay what you spent by the end of the month, you’ll be punished hard for it, putting you that much further from a good credit score.

5. Not Prioritizing High Interest Payments.

Owners of multiple credit cards sometimes struggle in juggling their balance payments. The best way to simplify the payment process, while keeping your payment rates low, is prioritizing the highest interest rate cards first. Leaving those payments for last and paying off smaller interest payments first will cost you more over a long period of time.

Basically, the quicker you pay off high interest rates, the more you save.

When it comes to increasing your credit score, these credit card tips are a great start. Learning how to use a credit card correctly helps avoid common credit card misuse, building the foundations to a good credit score.

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