6 Beginner Credit Card MISTAKES (Must Avoid)

No one teaches you in school how credit cards work, and it's no surprise that because of this, credit card debt across America is trending higher and higher this year after dipping slightly in 2020. In this video, we're going to go over six credit card mistakes that beginners make, and these are common mistakes that I see from newer users of credit cards that end up hurting their credit score and their budgets. All of these mistakes can be easily avoided as long as you're aware of them. So that's my goal today, to educate you on how credit and finance works in the simplest way possible so that you can save money and make your money work for you. All right, so getting into it, we're going to start off with two credit card mistakes in one, which is number one, carrying a balance month to month, and number two, they're not treating their credit cards like cash. Carrying a balance is expensive because you'll begin to owe interest charges on that balance. Pretend that you spend $250 on a credit card this month. The credit card company won't make you pay that entire $250 back at the end of the billing cycle. Instead, they're just going to give you the option to pay just the minimum payment of $35. For many beginners, they see this and they just make the minimum payment because why not? But here's why that's a mistake. If you only make the minimum payment, you'll end up carrying that $215 balance over to the next month, which means that you'll owe interest on those $215. Interest charges can add up quickly, and that's where people get into financial trouble. In fact, carrying a balance will cancel out a lot of the rewards that credit card companies offer you by using their cards. If you want to beat the credit card companies at their own game, it's in your best interest to keep your balance as close to zero as possible. The best rule of thumb that I have for you guys when it comes to using your credit card is that you should try to use your credit card like cash. That happens to be the number two mistake that people make, which is a lot of people don't treat their credit cards like cash and they end up spending money that they don't actually have. I will tell you this though, if you treat your card like cash, you will never get into a situation where you spend money on a card, don't have enough funds to pay it off, and end up accruing a ton of debt. Also, to maximize your rewards from credit cards, treating your card like cash will make it so that companies are paying you to do your everyday spending rather than the opposite, which is where they profit off of you. On average, credit card interest rates are between 18 and 25% annually. That's absolutely mind-blowingly high. By comparison, a car loan is around 4% and a mortgage right now is about 5%. It's a reason why some people get into a vicious cycle where they accrue so much in credit card debt that they can never climb their way out. So the best thing to do in this case is just to avoid consumer debt altogether and treat your card like cash and don't carry a balance. All right, the third mistake I see people making as beginners is choosing the wrong starting card. Just like your first Pokemon, if you choose the wrong starting card, you might be stuck with it for a while before you can get a new one. I chose Bulbasaur as my starting Pokemon when I was in sixth grade and let me tell you, I've been scarred for life. So what are the best starting cards? In my opinion, the best are those with no annual fee, a great signup bonus, and good perks if you can find them. Let's compare two cards in this scenario. The Chase Freedom Unlimited is a no annual fee card with a $200 signup bonus when you spend $500 in the first three months. You also get 5% cashback on travel and gas, 3% on dining, 3% on drugstore purchases, and 1.5% on all other purchases. That's not a bad deal and it also comes with a suite of other benefits. It's a pretty good starting card because it has no annual fee, a signup bonus like we talked about, and you can probably average the cashback around to at least 2% across all those categories. Now the second card is the Bank of America Cashback Rewards card. It's a decent card but only offers 3% cashback in one category of your choice, 1% back on all other purchases, in addition to a $200 cash bonus when you spend $1,000. That's a very average card. It's not a bad card by any means like some of the fintech cards that are out there, but it definitely offers less value compared to the Chase Freedom Unlimited. The point of this comparison is that since you're hopefully trying to maximize your rewards and your spend, you should be trying to optimize for every single dollar. You want to make sure you're doing your research and due diligence on the best cards to get before you even apply. If it's your first card, you don't want to sign up for the wrong card like a store credit card or a mediocre bank card because you might be stuck with it for a while. Now some people will ask, well Humphrey, why can't I just cancel a card if I don't really love it? The short answer is that canceling your card could hurt your credit, and we'll talk about that in mistake number six, which is coming up shortly. Now when it comes to cards that include an annual fee, like the Chase Sapphire Preferred, if you're a beginner, you want to be a little bit cautious. Annual fee cards typically have better rewards and better signup bonuses, but you're going to be paying that annual fee in the long term. So you really just want to make sure that you can justify that fee every single year before even applying for those. For complete beginners, that's why I always suggest going with a no annual fee card that's simple to use until you can get your discipline under control. If you are looking for an annual fee credit card, I think the next logical step up would be in the Chase family with the Sapphire Preferred, especially if you travel. I personally use the Sapphire Reserve, which is the more expensive version of the Preferred card, and then I complement that with the American Express Gold card, and that's my personal combo. Because Chase and Amex have flexibility with their rewards points, it's a combo that I've thought through myself, and I also spend enough to justify their combined annual fee every year. So that's something you want to keep in mind for the future, which is if I get really into this credit card game, what are the options that I'd like to strive for? It's good to know those goals. The main core principle of any credit card strategy though is to ensure that you're reaping the rewards that the credit card companies offer you, and not vice versa. That all comes with a strong budget and discipline with your spending. Now personally, I know that it's really hard to keep track of your expenses and your finances, but I firmly believe that if you have a good method for seeing how much money is coming in versus going out on a daily, weekly, or monthly basis, then you won't really overextend yourself when it comes to credit cards. So I have my own finance template that tracks all of the above in Notion right here, which is a productivity app that I partner with. Their team and I work together to even build out a free financial template that you can download for free in the description below. So I think the best part about Notion is that it's customizable, so say if you wanted to create your own category for subscription fees or even side hustle income, you can do that directly in the template without any crazy coding knowledge. So here's my tracker, and I personally just use this for every expense and income that I receive. So whenever I get a paycheck or spend money, it's super easy to add line items, and then that way I always have a good picture of how I'm progressing throughout the month. At the top, you'll also notice that I get an overall profit and loss for the year, and I can even go through and see how every single month is shaping up. So personally, I like using Notion to save me time when it comes to financial tracking. It's also a little more hands-on than the other finance tracking apps out there, which I personally like because I do a lot of cash transactions. You can sign up for free and check out my templates with the link in description below, and thank you to Notion for sponsoring this segment of the video. The next credit card mistake that I see many beginners making is using too much of their credit utilization or maxing out their credit cards. The FICO credit score is made up of five factors, and of these five factors, credit utilization makes up 30% of it. Credit utilization in simple terms is just how much of your available credit do you actually carry as a balance from month to month. So for example, let's say you carry a $500 balance on your credit card and you have a $5,000 credit limit. That would mean you're using 10% of your available credit, and 10% is a good number to have because it shows to lenders that even though you're given a $5,000 limit, you aren't using too much of it. Now on the flip side, let's say you had a $5,000 credit limit, but a $4,500 balance, you're technically using 90% of your credit limit. And if you were to guess, that doesn't look good in the eyes of lenders, which could negatively impact your credit score. Credit bureaus will generally look at your overall credit utilization, so all your total balances divided by your total available credit combined across all your cards and credit lines. As a general rule, anything below 30% credit utilization is going to keep your credit score excellent, but personally, I think it's just best to pay it off in full every single month and have close to a 0% credit utilization rate if you can. This is going to be just much better for your sanity and your own peace of mind. Now, some of you will want to know when do credit card companies actually report to the credit bureaus? That depends, but according to this article from Credit Karma, quote, your balances are normally reported to credit bureaus on your statement closing date. So right before the closing date is when I'd be aiming to have my balance as low as possible for credit reporting purposes. The next credit card mistake I see beginners making is applying for too many cards in a short period of time. When you first get started with credit cards, it can be really tempting to just go out and apply for a bunch of new credit cards. There's all these rewards points, cash back, all these sign up bonuses that you can possibly get, and people tend to go a little bit crazy during this time. But this is where it's a mistake. By applying for a card, the credit card company has to do what's called a hard inquiry check. This is when the credit card company examines your credit report as part of the application process, and it's usually fine if you have one hard inquiry every six to 12 months or so. But if you have say three to four inquiries in a one to two month period, it can look a little bit sketchy to your lenders. That's because to them, it looks like you're trying to get multiple lines of credit and that's not typical behavior for someone in a good credit standing. Hard inquiries stay on your credit report for about two years, and usually when they are first incurred, you'll see a drop in your credit score. Credit scores do recover over time, so you shouldn't be afraid of a hard inquiry. You should just be aware of hard inquiries when they're bundled together. Similarly, if you apply for a car loan or mortgage, your credit report will get hard inquiried as well, so that's something you may want to look out for if you just have gotten a car loan or a mortgage. Since new credit accounts for about 10% of your credit score, you want to ensure that you aren't applying for too many cards at once because your score will see a drop and then it'll be harder to get approved for new credit cards in the future. Now along with hard inquiries, there are also soft inquiries, and these usually do not hurt your credit. The biggest difference between the two is that soft inquiries don't require consent and therefore don't hurt your credit versus hard inquiries require consent. So anytime you are consenting to do a credit report, that should raise some alarm bells in your head that this is now a hard inquiry. If you are a beginner, the one thing you should do is to really focus on choosing the right card to start with, which we've already talked about, but this one card will be your ally as you build your credit over time. After you've established your credit score for about one to two years is when I would start thinking about applying for another card, but only if you have zero debt and you're disciplined enough to be making your payments off in full. Now, the last mistake is canceling an unused credit card, especially if it costs you nothing to keep open. Part of your credit score is impacted by the average age of your credit history. That means if you have a card that's been open for one year and another card that's been open for five years, then the average age of your credit is three years. But let's say you close the card that's been open for five years. Well, you just dropped your average age down from three years to one year. So if the card isn't costing you a thing, don't make the mistake of canceling the card just because. Because if you do, you'll be bringing down the average age of your credit, which can also impact the score negatively. Now, here's a tip. If you do have an unused card that has no annual fee, make sure you spend like five bucks on it every few months or six months or so just to keep it active. It's a great excuse to buy yourself a coffee because you'll be caffeinated and also be keeping your credit score high. Now, some of you will have a card that has an annual fee that you aren't using and it's costing you money. If that's the case, you can call up your credit card company and ask to downgrade the card to a free option, which I've personally done with Chase cards in the past. I downgraded my preferred to a freedom version and it did not impact my score at all. If that doesn't work, then you can consider canceling the card. But I would only cancel the card as a last resort. And if it's costing you an arm and a leg without rewarding you for anything. Hopefully this also makes you realize that you need to be a lot more selective when it comes to opening a credit card. And it's part of the reasons that when I'm opening up a credit card, I make sure to do a ton of research before applying. All right, guys, let me know in the comments if you have any other credit card mistakes you think I missed, and also check out my links below, especially to the finance tracker from Notion. I sincerely thank you guys for watching and I'll catch you guys the next one. Peace.