Credit cards can be a great personal finance tool when used right. The problem is that many people abuse them or just don’t know how to use them.
Understanding the dos and don’ts of credit cards is the key to successfully managing and using your credit cards.
Why Understanding Credit Cards is Important
First, let’s talk about why credit cards are important because they often get a bad reputation.
Credit cards help you build credit. You can even get rewarded for using them if you qualify for one of the many reward credit cards available today.
This is why understanding how to use credit cards is important. For example, if you have a rewards credit card that pays 5% back on groceries and you spend $800 a month on groceries, you’d earn $40 back just for buying groceries.
But this only works when you know how to use credit cards. If you max out your cards or make your payments late, it could damage your credit.
Here are the top dos and don’ts when it comes to credit cards that you must know.
Do These 7 Things with Credit Cards
1. Do know your credit line
Know how much your credit line is and calculate 30% of that amount. You should never have over $300 for every $1,000 in credit line outstanding.
Your credit utilization rate makes up 30% of your credit score. Your credit utilization rate is a comparison of your outstanding credit to your total credit line. If you have over 30% of your credit line outstanding, it can drag your credit score down and make it hard to get future financing.
2. Do make more than the minimum payment
The minimum payment is what’s required, but you can always pay more and should try if you can. The minimum payment barely touches the interest that accrued on the debt, let alone the principal.
It’s best if you pay the balance in full since you shouldn’t charge more than you can afford to pay off in full. If you can’t, though, pay as much as you can each month to pay your debt off fast.
3. Do get a reward credit card that pays you for things you buy
Reward credit cards come in all shapes and sizes. Look for one that rewards you for the purchases you normally make. For example, if you travel a lot, a travel reward credit card makes sense. You’ll get rewarded for your airline travel, hotel stays, and rental cars.
If you don’t travel, though, a travel reward card doesn’t make sense. Think instead about where you shop the most. Do you want a card with revolving categories that you have to activate, or would you prefer a card that pays a high percentage for general expenses, like groceries and gas?
4. Do negotiate a lower rate
Most credit cards come with a high APR, but there’s no reason that you shouldn’t try to negotiate a lower rate.
Once you establish a good payment history and show that you use your card responsibly, call the customer service number on your credit card and ask them to lower your APR. You might be pleasantly surprised when they say ‘yes.’ If they don’t, keep trying in the future.
5. Do make your payments on time
Even if you can only afford the minimum payment, make it on time. You can always pay more toward the card down the road. Just never miss your due date.
If you miss it even by one day, you’ll get hit with a hefty fee (usually $35) and interest will keep accruing. If you miss your payment by more than 30 days, it will negatively affect your credit score too.
6. Do take advantage of the ‘extras’ credit cards include
Many people don’t realize the benefits that come with a credit card. Each credit card company offers something different, but here are some of the most common benefits:
- Car rental insurance
- Travel insurance
- Extended warranties on large purchases
- Free credit score tracking
7. Keep your credit cards open
A small part of your credit score is your credit age. This is how long you’ve had each credit account. The longer you have an account, the better it is for your credit age. If you have ‘old’ credit cards but don’t use them, just put them to the side, but keep them open. It will help your credit score the ‘older’ they get.
Don’t do These 7 Things with Credit Cards
1. Don’t max out your credit card
Your credit line isn’t meant to be maxed out. Using even more than 30% of your credit line is bad. If you charge over 30% of your credit line, pay it down or off as fast as you can. Maxing out your credit card shows irresponsible use of your credit and can damage your credit score and ruin your chances of getting a lower APR in the future.
2. Don’t charge what you can’t afford
A credit card isn’t an extension of your income. It’s a personal finance tool that helps you build credit, get rewards, and manage your expenses, but it’s not a way to buy more than you can afford. If you don’t have the money in your account to pay the balance in full, don’t charge what you’re thinking about buying.
3. Don’t take a cash advance
Your credit card may come with the ‘benefit’ of a cash advance, but don’t use it. Credit card companies are the only people that benefit. A cash advance not only has a higher APR, but it has fees too.
It’s often hard to get out from under a cash advance, which can leave you with bad credit and getting in over your head in debt.
4. Don’t open credit cards because you received an offer
It’s tempting to accept every credit card offer sent your way, especially when they promise a 0% APR or amazing rewards, but don’t.
Before you accept an offer, do your research, and decide if you need a new card. Will it give you more cashback or rewards than you receive now? Have you opened any credit cards recently? Opening too many credit cards at once can make your credit score fall fast and make it harder to secure other credit when you need it.
5. Don’t open a rewards credit card just for the rewards
Don’t focus just on the rewards you can get using a credit card. For example, you open a rewards credit card because you’ll get 5% back on groceries and gas, but you can’t afford to pay the balance off in full each month.
With a 23% interest rate, you are spending more than you’re earning in rewards. Only take a rewards credit card you know you can use AND pay off in the same month otherwise the rewards aren’t worth it.
6. Don’t open a new credit card to pay off an old credit card
If you’re in over your head in credit card debt, opening new credit cards only makes it worse. The only time debt consolidation with a credit card works is if you qualify for a 0% APR balance transfer credit card and you pay off the transferred balance before the introductory rate expires.
But you must also lock up the old credit card and act like it doesn’t exist. Closing an old account isn’t a good idea, but if you can’t help but rack up more debt because the credit line is available do it.
If you can’t control your spending, find another way to pay off the debt that doesn’t involve opening another credit card.
7. Don’t share your credit card number
Be very careful about where you use your credit card and who you share the number with, even if you think it’s a legitimate business. Do your research and never give the number to someone that calls you.
Make sure you know who you are giving the number to and that they use the proper safety measures to protect the information.
Use credit cards responsibly. They are a privilege and not a right and when not used correctly can cause you financial distress and ruin your credit score.
When credit cards are used right though, you have a powerful personal finance tool at your disposal, helping you earn rewards, build good credit, and protect your finances.