How you could be using your credit cards all wrong

How do you utilize your credit cards? This article outlines ways that may show you how you could be using your credit cards incorrectly.

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You could be getting a lot more out of your credit cards than you think.

We already know that millennials own the lowest number of credit cards of any other age group—in fact, two-thirds don't even own a credit card at all. But those who do may not be using them to their full advantage.

To make the most out of yours, avoid making these common mistakes.

Not paying off debt in time

Credit cards are for borrowing more than you have and paying off in installments, right? Yes and no, says Matt Shultz, an industry analyst at CreditCards.com. Interest can cause debt to accumulate quickly, and with credit card debt in America surpassing $1 trillion, keeping up with monthly payments is of the utmost importance.

"It's always a good idea to pay your credit card off at the end of the month and—if you can't pay it off in full—to pay as much as you can over the minimum," Shultz says.

That doesn't mean that there's never a reason to justify spending more than you have on hand.

"When you're spending money on a wardrobe for a new job or having the opportunity to travel "once in a lifetime, you can justify certain spending," Shultz says. "But the primary job of the credit card holder is to pay that balance off at the end of the month."

Canceling cards

The myth that canceling lines of credit is bad for your credit history mostly holds true. Because the average number of accounts you have open and your total amount of available credit both contribute to your credit score, canceling cards will cause your score to take a hit.

But it can still be a smart move to cancel some cards if they're significantly contributing to your debt.

"There can be a good reason to cancel a line of credit if a card has an annual fee and you know you're not going to use that card anymore," Shultz says. "The hit that your credit would take for canceling that card won't be necessarily worse than paying $50-75 for that annual fee."

But before you shut down that line of credit, call up the issuer and ask if you can downgrade to a different card with no annual fee.

Not shopping around

While many people stick to the credit card offered by their bank, they may be missing out on rewards that better suit their lifestyles. Rewards are no longer just about free airfare and cash back. Credit card companies know millennials are all about the experiences, offering everything from free Uber rides to 50% off Spotify® Premium.

"We have definitely seen banks who have bent over backward to offer experiences that go beyond the typical ones," Shultz says. "Experiences, like going to batting practice with major league teams or getting VIP access to music festivals, have never been the norm before now."

Using a high-interest retail card

Tantalizing rewards at your favorite retail store may tempt you to open a card there. However, it's important to be honest with yourself about the kind of spender you are, Shultz says. If you normally struggle to make minimum payments on credit cards, retail cards may trap you into paying high-interest rates.

"Those types of cards come with interest rates that are far higher than the average credit card," Shultz says. "While retail cards can be a good jumping off point, it's very important to not run up too much debt."

Avoiding credit cards altogether

A large number of millennials don't even own a credit card, and in many ways, they've had the least exposure to credit cards of any age group. The Credit Card Accountability Act of 2009 requires individuals under 21 to prove they can pay off their debt or have someone who can co-sign the application. It also means that credit card issuers cannot offer freebies to students in exchange for a credit card application, leading to a dramatic dropoff in their representation on college campuses.

Millennials are also likely to have a more negative perception of credit cards, given their experiences.

"Millennials came of age during the Great Recession and are scared—for good reason—about taking on card debt after seeing their parents get burned," Shultz says.

But having a line of credit open is important in more ways than just the obvious. A bad credit score can be a problem if you try to rent an apartment or take out a car loan, but it can also prevent you from getting a cell phone contract or potentially become an issue in your relationship.

"Bad credit will cost you a fortune over the course of your life in terms of high interest rates on mortgages," Shultz says. "It's better to make the mistakes early and reap the rewards early."

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Article copyright 2017 by CNN Money. Reprinted from the July 26, 2017 issue with permission from CNN Money.
The statements and opinions expressed in this article are those of the author. Fidelity Investments cannot guarantee the accuracy or completeness of any statements or data.
This reprint is supplied by Fidelity Brokerage Services LLC, Member NYSE, SIPC.
The third-party provider of the reprint permission and Fidelity Investments are independent entities and are not legally affiliated.

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