Editor's note: This story originally ran on Money Blue Book. It has been been reprinted here with permission.
I was at the house of a songwriter friend of mine who recently came back from a tour of Texas and Oklahoma, and he showed me an unusual souvenir he picked up on the road: a bill for the credit card he used to buy gas for the trip.
While that might not be a strange souvenir for most people, for him it was practically unheard of. As long as I'd known him, he had never had a credit card. He had been careless with credit in his early 20s, and for years he had been unable to get a decent rate from a credit provider.
After years of collection-agency calls and a near-bankruptcy, he's far from careless now. But not everyone has had the opportunity to learn good borrowing behavior the hard way.
If you don't want to learn the hard way, here are six things you may want to avoid as you build your credit history.
1. Missing your payment due date
To people who pay little attention (like my friend in his misguided youth), the due date on your bill may seem like a less rigid figure than it really is. The sky may not fall when you miss it by a few days, and your card may keep working. But late fees can stack up quickly, and negative credit reporting can occur after just one late payment.
2. Maintaining balances close to your limit
A good chunk of your credit score is based on your credit utilization. Using too big a percentage of your available credit can cause your status as a borrower to take a turn for the worse in the eyes of the credit-reporting agencies. On top of that, carrying large balances can make it difficult to pay down your principal, which is a key part of avoiding trouble with credit.
3. Making minimum monthly payments
Many people — especially new credit customers — may think that the minimum payment requirement on their monthly statement is the proper amount to pay. But paying only the minimum each month causes your balance to accrue more interest, raising the cost of your credit in a way that can fly under your radar. Putting as much as you can spare into your monthly payment can help you keep your credit costs down.
4. Taking credit card cash advances
Many issuers charge particularly high rates on cash advances — some as high as 15 points more than the regular APR. If you truly need cash, personal bank loans may offer a better way to get it, and they can come with the bonus of helping diversify your credit portfolio. But don't confuse personal loans with payday loans, which can be even riskier than a cash advance.
5. Asking for an increase in your credit limit
We've discussed ways to negotiate credit terms with your issuer, and there can be a right time to ask for a higher limit. But your credit company will sometimes make a hard inquiry on your credit report before authorizing a boost to your borrowing power, and that can have consequences for your credit score. When asking for an increase, you might want to ask if a soft or hard credit check will be involved.
6. Closing a credit card account
Your credit utilization ratio refers to the amount you've borrowed against the total amount of credit available to you. Reducing your amount of available credit by closing an account can have consequences similar to borrowing too close to your limit. Some institutions may also close accounts due to inactivity, so make sure to check your issuer's inactivity policy if any of your accounts are languishing unused.
These aren't the only things that credit customers should watch out for, but they do constitute some of the most common mistakes made on the road to personal finance savvy. Learning to avoid them early can save you some big headaches down the road.
Although, if you ask my guitar-slinger friend, there can be a silver lining to personal finance mistakes: He got at least one album's worth of material out of his hardships.
Justin Boyle is a writer and journalist in Austin, Texas.
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