Credit cards are a major part of most people’s lives in the U.S. At least 82% of adult Americans have at least one credit card and owe at least $1,500.
Getting your first credit card can feel like a rite of passage for young adults, and there are many things in life that one needs a credit card to purchase. However, credit cards can lead to bad financial habits, and it’s easy for someone who doesn’t have much experience with credit to make some crucial mistakes.
Hillary Seiler, certified financial educator, senior certified credit expert and president of Financial Footwork, Inc., and Steven Kibbel, certified financial planner and financial advisor at DayTradingz, explain mistakes first time credit users make, so you can avoid them.
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Opening Too Many Credit Accounts
Applying for multiple credit cards, all at once, with the assumption that having multiple cards will boost your score actually has the opposite effect, Seiler warned.
“Applying for multiple cards and opening multiple new credit accounts in a short window will actually drop your score,” she said. “When you apply for that many cards at one time, it can raise the red flag on your financial picture and flag the credit algorithm that something might be going on with you financially.”
Even if you are simply trying to build credit, this rush to get multiple credit lines ends up causing you to look financially unhealthy, she warned.
One of her clients, age 22, opened six credit accounts over a two month period with his family’s help, and his credit score dropped below 520 — even though he hadn’t spent a dime on the credit. It took a year of closing accounts to restore his credit.
“The best course of action is to apply for one card, use it for 3, 6 or 12 months, and then look to open a second credit card once you’ve mastered how to use the first one,” Seiler explained.
Using credit correctly is one of the key ways to make or break your score, Seiler said. Maxing out a credit card — meaning charging up to the card’s limit — is a common mistake she sees.
“It all starts with the 30% rule, the magic number to credit usage, if you will,” she said. Keeping your usage between 10% to 30% of your credit limit is ideal.
“For people just starting out with credit, they are typically offered credit limits in the $500 to $2,000 range, which is a great starting point. However, you cannot just spend $500 on a card with a $500 limit; your score [will] drop immediately and remain down, because you are not showing that you can use credit properly to match what the credit algorithm is looking for.”
Instead, she said, charge up to 30% of that limit in a month, pay off the card in full, rinse and repeat.
“If you can stay under 10% of your credit limit, that is the best case scenario. Maxing out your credit limits is a sure fire way to watch your score bounce around like a yo-yo.”
Making Only a Minimum Payment and Hoping for the Best
Having access to what feels like free money can lead to significant debt, Seiler warned. “Credit cards are short term, very expensive loans. If you don’t pay back the money you borrowed by the next statement, you start paying the bank heavy interest payments for the money you borrowed.”
Therefore, if you’re running a balance that is also accruing steep interest, minimum payments will not pay that debt down quickly.
“Credit is a financial strategy, and, if used correctly, can be a massive game changer. If used incorrectly, [it] can put you in a financial bind,” Seiler said.
Not Having Financial Literacy
First time credit card users tend to make mistakes “from simple misunderstandings, rather than ill intent,” Kibbel said.
“With credit, one little slip can lead to a big slide,” he said. “When I first started out, I’ll admit I didn’t know everything myself. In college, I got my first credit card and learned some tough lessons about revolving balances and making late payments. One semester, juggling exams and my weekend job, I forgot to pay one bill on time. The fees and hit to my score were a real wake-up call.”
That’s part of why credit literacy is a passion of his. The more you know before you get a credit card, the less prone to these mistakes you will be.
Paying late is a big problem Kibbel sees, because those fees add up faster than you’d think.
“Just being a week behind can cost you 30 bucks,” he warned. “And it gets reported to the credit bureaus, which keep tabs on your payment history for years. That means if you want a car loan down the road or to rent a nice apartment, one little late fee way back could impact your rates.”
He said, “It’s best to set up autopay or put payment reminders in your calendar so you never cut it too close.”
Not Reading the Fine Print
Credit card companies are notorious for sneaking a lot important information into that fine print that is often too small and dense for most people to bother reading.
“As for reading the fine print, it may seem boring, but it will save you serious dough,” Kibbel said. “Know the interest rate you’ll pay if you revolve a balance versus keeping purchases paid off. Watch for sneaky fees, too — like foreign transaction charges when traveling abroad.”
If anything doesn’t make sense, he suggested you can always give their customer service a call before signing on the dotted line. “A little homework can protect you from emptying your wallet on hidden costs later on.”
Additionally, interest rates, fees and reward structures vary significantly between issuers, and you’ll want to make sure you’ve found those terms.
Perhaps the most common mistake first time credit users make is simply overspending, Kibbel said. “Exercising restraint in initial card usage is advisable. While the spending flexibility credit provides is appealing, one must recognize it remains a debt requiring repayment.”
He warned that without discretion, “balances can expand precipitously and strain future finances.”
In the end, balanced, budget-conscious charge habits serve new users far better than indulgence, he said.
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This article originally appeared on GOBankingRates.com: I’m a Financial Planner: Mistakes First-Time Credit Users Make