5 Credit Card Mistakes Millennials Are Making
Credit cards are popular because they are easy to use and convenient, but there are also many things you should learn before using credit cards. For new cardholders as well as those just beginning their journeys into the complicated world of credit ratings and credit cards, managing and understanding the many types of credit cards and their terms can be confusing.
Several areas of life allow wiggle room for trial and error, but credit scores are much less forgiving. It's very easy to make a simple mistake that can result in not just a significant drop in your credit score, but also thousands of dollars in the future. That's why it's important to beware of these five common mistakes millennials and young adults often make with credit cards:
1. Using credit cards for daily items
Younger consumers and new credit users are often unaware of the proper use of credit cards. They love to swipe a credit card for each and every purchase. However, the only time it's recommended you use your credit card for everyday purchases, like groceries or fast food, is if you are earning specific rewards for those types of purchases and if you pay them off in full every month. If you carry a balance and use your card for everyday purchases, $20 in cleaning products and toiletries can end up costing several times that. If you are unable to pay for living expenses with cash, you may need to readjust your spending or create a budget before taking on the additional weight of a credit card.
2. Carrying Balances and Paying Just the Minimum
A common belief is that to build a positive credit rating, you have to get a credit card and also carry a balance from month to month. The problem, however, is that credit cards designed for new cardholders generally carry high APRs (Annual Percentage Rates) – as high as 25 percent. If you carry a balance from month to month and only pay the minimum monthly payment due, you are paying a considerable amount in interest on purchases, which can potentially create a mountain of debt you’ll be unable to pay down. Build your credit rating and save on interest by paying your balance in full each month.
3. Maxing Out Credit Lines
A new line of credit can be exciting and provide an opportunity to make a large purchase you've had your eyes on for a while. At first, it can seem like a simple plan – make the purchase and slowly pay it off. Maxing out credit lines, however, can signal to creditors that you're at risk of defaulting on your balances. Spending too much or maxing out your credit lines also affects your utilization ratio, an important factor in your credit score. Utilization ratio is the percentage of the total available credit the cardholder has used, and a high ratio indicates a higher credit risk. It is recommended to keep your total debt-to-credit ratio below 30 percent, which means you may have to put off that large purchase you've been dreaming of for a bit longer, or at least until your credit limit increases.
4. Not paying bills on time
Once you’re making late payments, you’re actually incurring more debts and may be penalized for late payments. Not only will you have to pay late payment charges on top of your minimum payment, there are also serious negative implications for your credit score. Late and missed payments result in negative remarks on your credit report and damages your FICO score as well. A bad credit score can create extra difficulties for all uses of credit. Lenders and insurers may deny your loan applications, and you may get rejected from potential employers as well. Consider all outcomes and effects before using your plastics in the wrong ways.
5. Taking out cash advances
Old: Cash advances are a very costly thing that people frequently do with a credit card. The fees associated with cash advances are very lofty and the rate of interest is also very high. So, you must avoid this option unless or until there’s an emergency.
New: Cash advances allow cardholders to use their credit card to withdraw cash, acting as a short-term loan taken against the available line of credit on the card. A cash advance is a convenient way to get cash out fast, but as with anything else you put on your credit card, it has to be paid back, and there are often fees and high interest rates associated with cash advances which will cost you in the long run. New credit users should avoid this option unless there is an emergency need to withdraw a large sum of cash. Consider the alternative options to a cash advance, such as taking out a personal loan.
Ready for your first credit card? A Robins Financial Credit Union Visa® Platinum Rewards card is one of the best credit cards you can carry. We also created the MyMoney MyWay® Accounts for those ages 16-26 to help young adults establish good financial habits early. With products like our MyMoney MyWay® Checking account that offers NSF forgiveness to our MyMoney MyWay® Visa® credit card, Robins Financial will keep you on track to a secure financial future.
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