College Grads: Credit Card Mistakes to Avoid

Last Updated Jun 23, 2011 2:17 PM EDT

Hey college grads, your formal schooling may be over but I have one more lesson for you. If you want to build and maintain good credit, you need to avoid some common credit card mistakes.

Chances are you already know that making a late payment is one way to trash your credit. That's because making on-time payments account for 35% of your total score.

It may also be obvious to you that co-signing a friend's credit card application is a bad idea too. If your pal misses a payment, or worse, defaults on a card, you're stuck with the bill and share the black mark on your credit report.

But in a recent blog post, brought my attention to a less commonly known mistake that many young people make: They max out their credit cards.

"Lenders evaluate your debt-to-credit ratio," writes "If they don't like what they see -- if you have reached your limit on one or more cards -- you become a risk. Lenders will suspect you are one big expense away from being unable to pay."

In other words, the folks who determine your credit score are watching to see how much of your credit line you use. (This is also called your credit utilization ratio and it makes up 30% of your credit score.) Not only do they not want to see you max out a card, they grant the highest credit scores to those who only spend 10% to 30% of their available credit. So if your credit limit is $2,000, you should charge no more than $600.

That may not seem like a lot of money, especially if your credit limit is even lower. One way to get around this problem is to sign up for a second credit card, which will increase the size of your overall credit line, suggests (But try to stop there. It also hurts your credit score to have a wallet full of credit cards.) Your available credit will also increase over time as you pay your bills on time and prove that you're a good risk.

Finally, try to use cash as often as you can. In our electronic world, it often seems easier and more convenient to use a credit card for everyday purchases. But if you stick with greenbacks and limit your credit utilization ratio, it could be the difference between a below average credit score and an exceptional one.

What credit card mistakes do you make?

Stacey Bradford is the author of The Wall Street Journal Financial Guidebook for New Parents.
Commerce Bank Card 1 imagine courtesy of Flickr, CC 2.0.
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