7 tips for using credit cards
Credit cards can come with some risks. Improper credit card use can lead to debt, the potential for identity theft or a lowered credit score. On the other hand, they can be useful tools for individuals who understand how to use credit cards responsibly.
Some financial experts like Dave Ramsey teach that you shouldn’t have a credit card under any circumstances. While Dave Ramsey shares a lot of useful personal finance information that has helped thousands of Americans, this is one instance where we happen to disagree with him.
If you can understand how to make credit cards work for you, there are many benefits you can take advantage of. If you’re a “good” credit card user, you’ll see an increase in your credit score. As your score increases, you’ll see countless benefits. You’ll be more easily approved for auto loans, mortgages and personal loans. Additionally, you’ll be given lower interest rates. On a bigger-ticket item, a lower interest rate can save you thousands of dollars over the life of a loan.
Most credit cards today also come with rewards. These rewards can be travel vouchers, gift cards or cashback. These hold monetary value and will save you money on future purchases. If you use credit cards without accruing interest, you’ll actually make money!
Still, experts like Ramsey caution against credit cards because they essentially believe consumers can’t control themselves and practice good credit card habits. That doesn’t have to be the case. This article will help you understand how you can learn to use credit cards in a way that only benefits you, with virtually zero drawbacks.
1. Understand the terminology
You can’t make sure you’re staying ahead of your credit card if you don’t understand the fundamentals and the terminology. A credit card is a physical card that you can use to make purchases in person or online. You should view your credit card as a short-term loan. The credit card company gives you a 30-day window to repay the “loan” in full. Otherwise, you’ll be charged interest on your outstanding balance.
When you receive a credit card, it typically comes with a credit limit. This limit is the maximum amount of money the borrower is willing to lend you. Your credit card also comes with a grace period. This period is the time between the date you made the purchase and the due date that appears on your credit card statement. If you pay your balance in full by the stated deadline, you won’t pay interest on your purchases.
Additionally, credit card lenders request a minimum payment for every statement (unless you didn’t use your card). This is the minimum amount they expect to be paid for the month so you can stay in good standing with them. If you don’t make your minimum payment, the credit card company may respond by charging you a late fee, increasing your interest rate, taking away your earned rewards and reporting you to the credit bureaus.
Your annual percentage rate (APR) is the annual rate of interest you’re paying for borrowing money. The average APR for credit cards in the United States ranges from 13 percent to 26.51 percent.
Your credit utilization is the ratio of the amount of credit you use per month versus the total amount of credit available to you. If you have two credit cards, each with a $5,000 credit limit, and spend $1,500 per month, you have a credit utilization ratio of 15 percent.
If you carry a credit card balance, miss minimum payments or make late payments, it’s reported to the credit bureaus. Credit bureaus take this type of credit behavior, along with your credit utilization score and a few other factors, into consideration when giving you a credit score, which indicates your overall creditworthiness.
2. Never miss a payment
The most important rule with credit cards is to never miss a payment. Every time you miss a payment, your credit score will see a decrease. According to FICO data, one late payment in a 30-day window can decrease your score by 37 – 83 points. Always make payments on time to avoid a negative impact on your credit report. At the very least, you need to make your minimum payments.
Additionally, when you miss a payment, you start paying interest. Credit cards have exceptionally high APRs, so you want to avoid this whenever possible. And a missed payment can incur late fees, which only adds to your cost of using the credit card. Ideally, you want to pay off your entire balance every month.
Famous investor and business tycoon Warren Buffet emphasizes how important it is to pay off credit card balances. Most credit cards start at an 18 percent APR. You could never get that kind of return on investments, so you should always prioritize paying off high-interest credit card debt first. Buffet told journalists, “If I owed any money at 18 percent, the first thing I’d do with any money I had would be to pay it off. It’s going to be way better than any investment idea I’ve got.”
3. Take it slow
When it comes to credit cards, you want to make sure you take it slow—test the waters and ensure you can stick to responsible usage habits. Start with one basic credit card. As you establish that you can handle your payments and understand card terms, you’ll be able to get more cards if you wish.
When you’re ready for a new credit card, make sure you allow time to pass in between each application. Every time you apply for any credit, your lender may conduct a hard inquiry into your credit. Having too many hard inquiries in a short period can negatively impact your credit score. Spread your credit card applications apart by at least three to four months.
4. Take advantage of your rewards
Before you sign up for a credit card, make sure you fully understand the rewards and benefits that come with it. Many cards have hidden rules you’ll want to know. For example, if your rewards have an expiration date, you’ll want to make sure you use them in time.
As you get more comfortable with credit cards, you may want to shop around for the one with the best rewards for you. The two most popular benefits are travel rewards and cashback. Try to find the types of benefits that work best for your needs.
5. Look out for credit card fees
It’s crucial that you understand the types of fees that come with your card. Many reward cards with the best benefits come with an annual fee. Let’s say you sign up for a reward card that gives you one percent cashback on groceries but has a $70 annual fee. You can calculate how much groceries you would have to buy in a year to cover that $70 fee and see a profit. If you realistically won’t spend that much on groceries, this card’s benefits aren’t worth it for you.
Other fees you should be aware of are late payment fees, balance transfer fees and foreign transaction fees, among others. When it comes to late payment fees, you want to avoid them at all costs. On top of your interest rate, you’ll also be paying a fee, so you’re paying a lot to use your card.
Other fees, such as a balance transfer fee or a foreign transaction fee, may be worth it. You’ll need to understand the costs and compare them to the benefits you’re getting.
6. Consider using your card to pay down debt
There are some situations when a credit card can help you pay down debt. Some cards offer a balance transfer and a zero percent introductory rate. Typically, a lender is trying to get your business, so they offer you the opportunity to transfer your credit card balance to a new card and take advantage of a zero percent interest rate for a short period.
If you choose this route, you need to be very careful. First, consider that this option typically comes with a balance transfer fee. Second, you need to make sure you actually take advantage of the zero percent rate period and make payments to lower your principal.
Financial expert Suze Orman encourages people in debt to look at balance transfer cards. In her words, “if it means you can avoid interest payments for a year or more, it’s still a good deal.”
7. Choose carefully which cards to close
It might sound counterintuitive, but you shouldn’t always close a credit card if you’ve stopped using it. It’s often better to keep accounts open even when you aren’t using them anymore because they can help you maintain a favorable utilization ratio. Your credit score may lower if your utilization ratio is more than 30 percent. When you close a credit card, you’re decreasing your total available credit, which can increase your utilization significantly.
Additionally, you may want to keep a credit card open to add to your average credit age, which is another factor in your credit score. For this reason, many people keep their first credit card open and simply leave it unused.
Of course, there are some scenarios where you may want to cancel a credit card. If a card has an annual fee or you’re afraid you’ll use the card when you shouldn’t, it might be best to cancel it.
Why you should use a credit card
Some of the reasons you should use a credit card include:
- To build credit: Your credit card can help you improve your credit score and open up new financial opportunities.
- To earn rewards: Your travel rewards can save you money on future trips. Similarly, cashback can help you actually make a profit on your credit card.
- To purchase protection: Credit cards come with a lot of protection from fraud. In comparison, fraudulent purchases on a debit card can be much more difficult to prove or get reimbursed for.
- To budget: A credit card also lets you keep track of your purchases, which will help you budget. Multimillionaire Grant Cardone encourages individuals to avoid cash and pay with credit cards “so you have a complete record of each expenditure you make.”
Find a card that works for you
There are many lenders out there offering different kinds of cards, so it should be relatively simple to find the card that works best for you. If you value travel, you might want to find the best travel reward cards. Students can look at a student card that often comes with perks relevant to the college lifestyle. Individuals worried they’ll overspend may want to consider a secured credit card.
from a Credit Expert