Credit cards can make life easier. You can worry less about carrying cash or paying immediately. Credit cards can be used to buy almost anything you need online or pay in person with the swipe of your phone. But the ease of paying comes with the risk of spending too much. If you aren’t careful using your credit cards, you can find yourself in debt.
Read on and discover how to use a credit card wisely.
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Top tips for how to use a credit card responsibly
Credit cards can help us get what we want now and pay it off later. But if you aren’t careful, you can easily find yourself trapped with credit card debt. Credit card debt is typically high interest, meaning you could spend more than double the original item’s price with interest.
Learn how to avoid credit card debt and responsibly manage a credit card with these tips:
1. Read the fine print
Before you commit to a credit card, make sure you review the issuer’s terms and conditions. Look for costs you may have to pay, such as annual fees, delinquent payment charges, or balance transfer charges. Ensure you understand the interest rate you’ll be charged and whether it changes over time.
Some credit cards offer special incentives, such as cashback or points. Be sure you understand how these programs work. The cashback percentage may vary depending on what you buy or the spend category.
Some reward programs may only be available if you buy online or from specific retailers. Read the fine print and remember that regardless of the reward or cashback, it’s never worth spending more to “earn” more.
2. Choose the right credit card
Credit cards are not one size fits all. You should choose the card that best fits your financial situation and spending habits. First, unless the cardholder rewards justify the annual fee for your lifestyle, choose a credit card with no annual fees.
Second, consider a secured card if you have a low credit score or need to build a credit history. A deposit is typically needed for a secured card. By making prompt payments, the issuer may raise your limit.
Alternatively, a student credit card is an unsecured card designed for college students with limited credit history. Likewise, low-interest rate credit cards are a good fit if you intend to carry a balance from time to time. Or look for a card with a 0% introductory annual percentage rate (APR) for the first 12 to 21 months.
You may already have credit card debt you are paying off. If you are being charged a high-interest rate, look for a card with a 0% introductory rate. You can save on the interest payments if you can transfer your existing balances to your new credit card.
If you like perks, choose a card that rewards you with cashback, points, or miles. Double-check that the card maximizes rewards where you spend money regularly.
3. Avoid creating multiple accounts within a short span of time
Applying for multiple credit card accounts within a short time can harm your credit score. Generally, plan to wait several months between credit card applications, and don’t apply for more than two to three new credit cards annually. There are two reasons for this.
First, 10% of your credit score is based on new credit. Several new credit accounts signal to lenders that you already have significant credit lines available and are perhaps planning to take on more debt.
Second, the issuing bank could perform a hard inquiry on your credit with each new card application. This could cause a temporary dip in your credit score. Some card issuers will automatically decline credit card applications if you’ve already opened several credit cards within a specific time frame.
That said, the additional credit line from a new credit card can boost your credit score over time. Apply deliberately and infrequently to build your credit score.
4. Monitor your credit card balance
Paying off your credit card can prevent you from accumulating large interest payments. While it’s easy to overspend, regularly monitoring your credit card balance and verifying all charges can help keep debt under control. You can monitor credit utilization by checking the total balance and available credit on each card or by using an app that allows you to check your credit score.
5. Keep a low utilization ratio
The percentage of available credit you use is your credit utilization ratio. A low credit utilization ratio shows lenders that you can use debt responsibility and haven’t used all available debt. Generally, lenders look for a credit utilization ratio of 30% or less of total available credit. Credit utilization of 10% or less is usually ideal.
Your credit score can drop when you exceed 30% credit utilization. Because your credit utilization ratio makes up 30% of your credit score, this dip can be significant. But you may be able to also ask for a credit limit increase to improve your credit utilization ratio even while paying off debt.
6. Make payments on time
When you fall behind on your payment, it can cost you. Even if you are one day behind with your payment, you can be hit with a past-due payment penalty. You might even see an increase in your interest rate. You can set up automatic payments for the minimum amount due to avoid late-payment penalties and protect your credit score.
7. Leverage rewards
Take advantage of rewards when possible. Many issuers offer incentives to use their credit cards when making purchases, such as cashback, points, or miles. The credit card company can run a special deal where you can get a percentage off when you buy from select retailers or brands.
Rewards are a nice way to get something back if you plan to use your card for purchases that you ordinarily make. But if you spend more money to earn rewards, it is rarely worth it.
8. Keep an eye on your credit score
Part of using your card wisely is tracking your credit score. Manage how much credit you use to avoid a drop in your score. Routinely check your credit report for errors or debt that isn’t yours. It’s a good idea to notify the credit reporting agency of any mistakes and request a correction.
You’re entitled to a free annual credit report from all three credit bureaus — Experian, Equifax, and Transunion — at annualcreditreport.com. You can also check your credit score through MoneyLion’s CreditBuilder* or with many credit card issuers. If you suspect credit card fraud, you can contact the card issuer and all three credit bureaus and request to freeze your credit to protect yourself.
9. Understand the interest rates and fees
It is essential to understand how much a credit card will cost you. You may be charged a hefty interest rate to carry a balance. Some credit cards charge fees when you transfer balances, take cash advances, or go over your credit limit. Many credit cards also charge an annual fee. Double-check all credit card fees and cancel any cards with too many fees.
10. Safeguard your card from unauthorized usage
Regularly check bank statements and verify all charges to protect your credit card from unauthorized use. If you see an unauthorized charge, contact the credit card issuer to report it, and request a new credit card. It will typically be sent to you the same day.
11. Refrain from using your credit card for cash advances
Credit card cash advances typically come with high interest and fees. To save more, avoid using a credit card for cash advances. Consider using a debit card linked to a checking account for cash withdrawals when needed.
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12. Take on a debt repayment strategy
Credit card debt can add up quickly. Having multiple cards with balances can make credit card debt difficult to manage. If you fall behind, applying strategies to pay down your credit card debt is helpful.
The debt snowball method is one common approach to paying off what you owe. Here, you prioritize paying off your debt from the smallest to the largest balances. Focus on paying off your smallest debt first while paying minimum amounts on your other debts. Once the debt is paid, move on to the next-smallest debt. Paying small debts helps you stay motivated to deal with your other debts.
Another popular strategy is the debt avalanche method. Under this approach, focus on paying off the debt with the highest interest rate first and making minimum payments on all others. This strategy will save more money as you first pay off the most expensive debt. Learn more about government credit card debt relief programs.
13. Stick to a budget
Credit cards should be used for purchases you’d make in the ordinary course of your budget. Use a credit card to pay your utility bill or fill your gas tank. Just be sure to pay your credit card balance in full each month. By limiting what you buy, you can better control what you owe.
Building strong financial health
The way you use credit cards affects your financial health. You can save money by managing your credit cards responsibly. A credit card offers a financial cushion for unexpected or unplanned costs. Best of all, using credit cards wisely can expand your future borrowing opportunities by building a positive credit history. Want to learn more? Learn how to raise your credit score by 200 points.
FAQ
Can I use my credit card for all my expenses?
You can use a credit card for most expenses, including gas, groceries, and utilities. You may be unable to use credit cards for certain expenses like loans or mortgage repayments.
How can I avoid overspending on my credit card?
To avoid overspending on your credit card, set a weekly budget and only spend within that budget. Only spend what you can afford to pay off at the end of the month. If that’s too difficult, consider putting away credit cards for a while and using cash or checks to stick with a budget.
What happens if I miss a credit card payment?
If you miss a credit card payment, the credit card issuer may charge a late-payment fee and interest on the balance due. The late payment will also appear on your credit report, potentially harming your credit score.
