The first thing that really scares you off is the credit card when it comes to personal finance management. You are often told not to use your credit cards in order to avoid overspending. However, the fact is that not using your credit card at all cannot help you with your overspending behaviour.

The debate on whether you should use a credit card or you should not use a credit card does not seem to end, but the fact is that you need to be very careful about the use of your credit card if you are looking to improve your finances.

Plastic cards can cause a lot of damage to your financial condition if you do not use them sensibly. The key to staying out of debt is using your credit card responsibly. There are plenty of credit card mistakes that you can likely make, and they may take a toll on your credit score and financial condition.

Tips to Manage Credit Cards to Avoid Falling into Debt

If you want to improve your finances, it does not mean that you will completely stop using your credit cards. Whether you will keep your cards open or closed depends on how it will affect your financial condition. Here are some common credit card mistakes that you can make and tips to avoid them.

• Not paying your bills on time

You are often told that you should avoid using your credit card to avoid falling into debt, but nobody tells you that you can fall into debt even if you do not use them. For instance, despite using cash for all of your expenses, you can end up overspending on your discretionary expenses, and this may result in insufficient cash that you may need for necessary expenses.

Of course, you will rush to online lenders to take out loans for bad credit with no guarantor and eventually, you will end up falling into debt. Credit cards are notorious for trapping you into debt, but the fact is that if you are reckless with your spending, you cannot improve your financial condition at all.

There is nothing wrong to make a purchase using a credit card as long as you pay off the balance on time. The problem with using a credit card is that people do not realise their affordability. They keep buying things, and then they realise that they cannot pay off the balance within the grace period.

If you pay back the balance within the grace period, you can avoid paying interest, but when you are past the due date, you will have to pay interest, and it will definitely be relatively higher. If you are using your credit card, make sure that you pay off the bill within the grace period so you can avoid paying interest penalties.

• Maxing out your credit card

Every credit card comes with a specific balance limit. When you use your credit card to make a purchase, it means you have borrowed that amount, and it will increase your debt utilisation ratio. If you max out your credit card, it means you have used the whole of the amount as debt, and of course, your debt utilisation ratio will go drastically up.

It shows that you cannot live without debt. Next time, the lender will look over your debt utilisation ratio when you borrow a certain amount of money. After seeing that you have maxed out your credit card limit, they will suspect your repaying capacity.

They will assume that you do not manage your funds carefully and keep borrowing with no intention to pay back. You will not only have a lower credit score, but you will also struggle to qualify for the loan. Experts suggest that your debt utilisation ratio should not be more than 30%.

For instance, if you have a credit card with a maximum of £1,000 and you have used £300, it means you have used 30% of the available limit. If it goes above and beyond this, it can have a negative impact on your credit score.

Note that when it is said that the credit utilisation ratio should not be over and above 30%, it includes all debts you have taken on. It is important to note that you should stick to this ratio because otherwise, you can have difficulty applying for loans at affordable interest rates down the line.

The best thing is that you should create a budget and maintain a balance between cash and credit card usage, so you do not max out or increase your debt utilisation ratio.

• Closing your credit cards

You may have several credit cards, and you may not have been using all of them, so that you may lose some of your credit cards. You may think that it makes sense to close your old credit cards, but sometimes this takes you nowhere because it leads to an increased debt utilisation ratio.

Once your debt utilisation ratio goes up, your credit score will go down, and then you will likely have difficulty borrowing money. For instance, if you have three credit cards and each one comes with a maximum balance of £1,000.

You have used £1,000 from two of them already. The debt utilisation ratio will be 33.33%. If you close the third credit card, the debt utilisation ratio will go up to 50% from 33.33%. Of course, your debt utilisation ratio will cause you difficulty while borrowing money.

If you lose your job and need an urgent amount of money, you will have difficulty applying for loans for the unemployed with bad credit. To keep your debt utilisation ratio low, you should have old credit cards opened but sometimes closing them makes sense when you are to pay annual fees.

Well, if you are to close your old accounts to avoid annual fees, it will cost you your credit score. A rule of thumb says that you should already keep the balance as minimum as possible, so it does not affect much.

• Applying for too many credit cards at once

Another common mistake that people make while using credit cards that drops their credit score is applying for too many credit cards at the same time. The more credit cards you apply for, the more points you will lose.

Note that a lender will run a hard credit check each time you apply for a credit card. It will have an impact on your credit score undoubtedly. If you apply for too many credit cards within a short period of time, it will make lenders suspicious about your money management ability.

This is why you avoid applying for a credit card when you have already taken out a loan, including a long-term loan like a mortgage.

The bottom line

If you are trying to improve your financial condition, you will have to learn the way to manage your credit cards. If you do not manage your credit cards sensibly, you may lose your credit score. This will worsen your financial condition. Make sure that you try to avoid the credit card mistakes mentioned above.