NEW York (CreditDonkey) — To an outsider, Millennials may seem to be on top of their financial game: Gen Y has the fewest number of credit cards and lowest average balance on those cards.
So far so good, right?
But Millennials also have the lowest credit scores of any generation, and many within this cohort tend to be late on their payments. There are a few age-related reasons for that, like having a shorter credit history, but there are also things that Gen Y could be doing better. For example, many Millennials have lower credit limits and max out their cards, which actually hurts one's score more than simply obtaining a higher limit.
With unemployment and financial uncertainty as high as they are, it'd be a shame to let the economy get the best of our credit scores. That's why we've compiled some of the biggest mistakes people make when it comes to credit cards.
Others have fallen into these traps, so you don't have to.
Missing a Due Date
This may go without saying, but one of the worst ways to bungle your credit is to miss a deadline on your bill. There are a few reasons. First, late payments can seriously injure your credit score. Second, the amount you actually have to pay will skyrocket once the interest starts to stack up. Third, if you missed the due date because you were busy scraping together the money to pay your bill, then missing the deadline could spark a vicious cycle of scrambling to catch up. Stop that cycle before it starts by paying every month, on time.
Tapping Into Too Much of Your Credit Limit
One of the components of your credit score is your "credit utilization ratio," or how much of your available credit you actually use. This ratio is calculated across all your cards, so if you have five cards with a $1,000 limit apiece, your total limit is $5,000.
If you spend $2,500 of a total $5,000 limit, your credit utilization ratio is 50%. Ideally, you should aim to keep your usage under 30% if possible.
Closing a Bunch of Credit Cards
If spending too much on your credit cards is bogging you down, it may seem intuitive that closing out your cards and vowing to be more responsible should be a good thing. But alas, everything in moderation. Canceling your cards will hurt your credit utilization rate by lowering your total available credit, so don't jump to cancel a bunch of cards at once.
Part of your credit score is based on the length of your credit history, and that's calculated by averaging the length of each of your lines of credit. As a result, your oldest credit card is one of your most valuable. If you close that account, your length of credit will decrease and hurt your score.
Looking for a way to thwart temptation to overspend without canceling your account? Try hiding your credit card in the freezer or somewhere you won't see or think about it regularly. While you're at it, check out some tips on impulse buying and how to avoid it.
Making Just the Minimum Payment
Don't get us wrong; to preserve your credit score, you should always pay at least the minimum on your balance, and it's important to have some emergency savings before throwing everything you've got against your debts. But depending on your financial situation, paying only the minimum can set you at a disadvantage due to the way interest can rack up. (Here's more on why that is.)
For example, if you have a balance of $5,000, a 20% interest rate and make only a minimum payment every month, it could take you as long as 49 years to pay off, with over $21,000 in interest payments!
Upping your monthly payment, however, would reduce your total interest payment drastically and allow you to ditch your debt much faster. What a difference a little extra firepower makes.
Falling Prey to Balance Transfer Fees
If your credit card charges high interest, it might be a good idea to transfer your balance to a lower-rate card. All the same, balance transfers often come with a fee that can be as high as 4% of the balance being transferred. That may sound low, but it can add up to a lot if you have a big balance.
One good opportunity is if you sign up for a card with an introductory 0% APR balance transfer. Of course, that intro period will only last so long and you may face significantly higher rates afterward. If you go this route, make sure you're aware of all the fine print and use that time with a lower interest rate to accelerate your repayments. Looking for guidance on how to choose the best balance transfer card? Read this.
Using Free 'Convenience Checks'
Your credit card company may throw some "convenience checks" in with your card statements, but these checks — which look like those you might find in a checkbook — aren't a good idea. Unlike a check linked to a bank account, using a convenience check amounts to taking a cash advance on your credit card.
The amount you write out on one of these checks is deducted from your credit line, and you'll likely be charged an extra high interest rate associated with cash advances. In some cases, the cash advance rate could be twice as high as your usual interest rate. On top of that, you could face a fee. Making matters even worse, the charges for a cash advance will usually start to accrue immediately, without the grace period you usually receive before your bill. Even if a credit card offers a lower-rate promotional period, know all the rules associated with your convenience checks and don't sign unless you're prepared with a solid repayment strategy.
Cosigning for Someone Who's Not Great With Money
Whether you're asked by a child, sibling or friend to be the cosigner on a financial account, you need to know the risks. Yes, you want to support your loved ones and it feels unkind to say no, but when you cosign for someone, you take responsibility for his or her actions. So, if you cosign for someone who racks up insane bills and refuses to pay them off, you'll either have to step in or risk ruining your own credit score.
Applying for Too Many Cards
It's good to comparison shop for the best credit card, but it'll hurt your credit score to apply for a ton of cards in order to decide which is your favorite. Every time an outside company looks at your credit report—doing so is called an inquiry—your score may take a small ding, usually no more than five or so points. One or two inquiries probably aren't a big deal, but if you apply for a lot of cards at once, each inquiry may lower your score enough that you might find it harder and harder to have your card application accepted.
Plus, applying for a lot of cards at once implies risk to your lenders. After all, they may ask themselves, why does this person need such a huge credit boost so fast? People with six or more credit inquiries on their reports are as much as eight times likelier to undergo a bankruptcy than those with no inquiries.
Bottom line? Only open one credit card at a time, and do your best to research the best card for your situation before applying.
Not Using Your Credit Card
Although it may sound like the best way to avoid overspending is to skip using your card altogether, a card issuer could potentially close your account due to inactivity if you don't use it at all over a long period of time. Having a credit card in good standing is good for your credit score, because it contributes to your credit history and credit utilization ratio. If you'd rather use your card sparingly, try charging one tiny item each month and repaying it immediately. That's enough to keep your card active.
Spending More Than You Can Repay
This may be the oldest mistake in the book, but we'd be remiss not to include it here: it's a bad idea to spend more than you earn, plain and simple. Don't charge something to a credit card if you don't know how you'll pay back your bill.
Credit cards can be a powerful tool for building a solid credit history, but they can be a double-edged sword. Use them responsibly, and they can do a great deal of good. That, of course, is the key.
—Written by Allison Kade