Credit cards can be a great financial tool, or a fast path to financial destruction. Credit cards make it easy to buy almost anything, but always at a much higher cost over the long term. They’re also a fantastic tool to improve your credit history as long as any carried balances stay low and ideally you pay them off in full each month. Learning how to use credit cards wisely is key to avoiding financial pitfalls.
Keep these key tips in mind before using your plastic:
1. Pay off your entire balance in full each month.
By following this rule, you will never have to pay any interest. If you can’t pay for something at the end of the month, you can’t afford to own it at all.
● Make all of your payments well before the due date. Credit card companies make more profit from late payment fees than they do from interest. Don’t let the bank profit out of your pocket!
2. Stay well within 30% of your credit limit.
Much of your credit score is determined by your credit utilization rate. This is the ratio of available credit that you’re currently using to fund purchases. Banks refer to this as your ‘utilization ratio’.
● The general consensus of personal finance experts is that you should be okay for as long as your ratio stays below 30%. For example, if your limit is $10,000, you should never have a balance of more than $3,000.
3. Negotiate for a lower interest rate.
No interest rate is set in stone. Your credit card company would much rather get 15% or 16% than get 0%. You’ll likely be surprised at how much you can get when you call and ask them to lower your interest rate. The trick is to let them know you’re thinking of switching to a lower interest rate card or accepting a debt consolidation offer.
4. If you can’t make a payment, let the company know ahead of time.
Refrain from waiting until they decide to come and chase after you. Be proactive by explaining your situation. Credit card companies are almost always willing to work something out as opposed to risk getting stiffed entirely. At the very least you can usually get a late fee waived.
5. Keep your accounts open even if you don’t use them.
Remember that your utilization ratio is important. If you close your account, you reduce the amount of credit you have available to you. Unless you have a zero balance across all accounts, this will raise your utilization ratio.
● Cancelling a card with a high annual fee is a good idea if it doesn’t otherwise benefit you with cash back, points, or other rewards.
6. Be cautious using a credit card for everyday purchases.
It’s far too easy to overspend. Avoid buying things you don’t have on things you don’t need. If you use a credit card to buy all of your groceries, gas, clothing, and other weekly expenses, you might find yourself short when the bill comes due. Always keep a close eye on your charges.
7. Find the right card.
There are so many options out there it can be difficult to know you’re making the right decision. Do some research and find the card that best fits your personal financial situation.
• Remember that the various kickbacks that are offered are not only to entice you to sign up for their card, they are also there to get you to use the card more often. Be smart when using credit cards and avoid the temptation to over-extend yourself.
Credit cards can be a wonderful tool to build your credit score, get through emergency situations, and shop safely. However, with improper use, it’s just as easy to get in a deep hole. Be disciplined and smart with your credit cards for a better financial future.