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Credit cards, they can be a handy financial tool when used properly, but most of the time they’re the bane of our financial problems.
Did you know that the average American has 3 or 4 credit cards in their wallet? This causes Americans to be in about $5,700 of credit card debt. I hope you’re not one of them, but even if you are – don’t worry there’s a way out.
So, let’s look at seven ways to use our credit cards wisely:
1. Get a card that fits your spending habits
How many times have we gotten credit card offers in the mail?
The credit card offered seems like a good deal, such as earning points towards free airfare. The catch with that card is that you need excellent credit to begin with and unless you shop with this card frequently, the card gets closed after 18 months of non-use.
So, you’ll need to find the right credit card for your spending habits and lifestyle. Let’s say you shop frequently on Amazon, then an Amazon credit card would suit you more as you get 3% back on every Amazon purchase (plus a free $50 gift card upon approval).
Be sure to do your homework, compare cards, and read the fine print to best find a card that suits your spending habits and budget.
2. Pay your credit card on time
This seems like a no-brainer, but you’d be surprised to know that 2.84% of credit cards are delinquent, meaning payments are 30 or more days late. You may think that a major reason why people say they’re late on their credit card payment is that they simply did not have the cash, this is true but the top reason is that they simply forgot.
What happens if you miss a payment or two? One late payment can affect those with higher credit scores, as much as a 90 to 110-point drop on a FICO score of 780.
To counter this, either set up automatic monthly payments through your online banking or create a reminder on your smartphone or computer calendar to notify you when it’s time to pay.
3. Keep track of your spending
Because a credit card is “instant money” it can be very easy to rack up more debt on your card than you can afford to repay, so it’s important to track your spending.
Download your credit card’s app or use a budgeting app to stay on top of all your spending. Make a habit of checking your balance and your budgeted amount before making purchases so you can stay within your budget.
If you spent too much, you’ll add strain to your monthly budget – either by having to take money away from another category to cover your bill, or only making a partial payment which increases your interest rate as well as adding to the length of time it takes to pay it off.
4. Maximize your monthly payments
Did you know that the minimum monthly payment specified on your credit card statement is a trick used by companies to make more money?
They set the minimum that will cover a small amount of the principal, meaning it takes longer to pay everything off, which incurs interest. For example, your credit card has 18% interest and a balance of $10,000 and the minimum payment is $200. The interest is $150, and only $50 is for the principal – in 12 months that’s $1,800 in interest and $600 on your balance.
To counter this, pay more than the minimum each month – either more money monthly or make more payments. Paying a little bit each week actually creates a larger payment. Let’s say you have a minimum of $80 a month – one year’s worth is $960, you try increasing it to $100 a month, that’s $1,200. Now, let’s say you paid $30 a week – that’s $1,560 paid on that card.
Not only will paying more money on your card monthly defer these interest charges, but help you pay off that card faster. I covered this more extensively in my other article “8 Ways to Pay off Credit Card Debt”.
5. Don’t use your credit card to make ends meet
What if you’re short on cash before payday and you can’t cover some expenses? Using your credit card or getting a cash advance is not going to work for you in the long run. It might get you through the immediate crisis but you’ll eventually end up in even more debt.
The sad thing is you know that won’t be the first time you’ll be in a tight jam, sometimes it can take a few months of this repeating until it smoothens out. Credit cards have a set credit limit, what will you do when you’ve reached it?
This is why it’s so important to have an emergency fund to cover any unexpected financial costs.
6. Check your credit card statements
Going through the mail and you get your credit card statement, do you open and read it? Many people actually don’t, they open it, maybe peek at the minimum due and the due date, and file it away.
If you’re skipping the statement, that can have a big impact on your finances and your future credit decisions.
The things you’re missing can include: due date, the listing of transactions, your credit limit, and any money-savings offers from your credit card company. Let’s look at each one’s impact:
- Due Date: Not knowing the correct due date affects paying on time, interest charges, late payment charges, and even your credit score. The due date isn’t always set in stone – it can change especially after making a large purchase.
- Transactions: Not checking your transactions and comparing them with your receipts can incur unwanted charges and you’re paying for something you didn’t buy.
- Credit Limit: If you don’t know your balance, or check if your limit has changed you run the risk of exceeding your limit and your card getting declined (or even closed).
- Offers: Sometimes there are money-saving offers enclosed that could save you money, such as rate changes, balance transfer opportunities and such.
So, be vigilant in checking your credit card statements and compare with all your receipts for any errors and report any discrepancies to the company.
7. Close your credit card account properly
You finally paid off that credit card and you celebrate by cutting up the card and throwing it out. But, we forget that the card is still open at the company.
It’s important to close your credit card account correctly, not doing so means you could still be charged fees or penalties, even if you no longer use the card.
You could also leave yourself open to undetected fraud if someone else uses your card and that leads to defaults on your credit report.
Here’s how to close a credit card:
- Cancel all direct debit payments made to your card
- Pay off the total balance (or transfer it to another card)
- Call your credit card company and request the account closure
- Follow up with a letter to confirm your request. Include details of the phone call, your account number, signature and date
- Wait to receive a confirmation from the company – a letter or final statement, follow up if you don’t receive this
Closing a credit card will affect your credit score somewhat, but I think that’s minor compared to having surprise charges and having a defaulted score is worse.
I just listed 7 credit card tips to avoid costly money mistakes, but let me emphasize what happens if you rely on your credit card too much:
- You’ll run out of credit – you have a set limit, so what will you do when you run out?
- You may have trouble paying it off – relying too much on your card you’ll reach a point where you can’t repay it and it’ll take “forever” to pay off or default on it altogether.
- You run the risk of losing the account – Going over the limit or missing payments can cause the company to either lower your credit limit or close the account altogether.
- Your credit score is impacted – The amount of debt you have is the biggest factor of your credit score calculation.
- You pay more – you’re paying interest on everything you’ve charged on it and the longer it takes to pay it off, the more interest you’ve paid.
- You stay in a financial rut – Relying on your card doesn’t improve your situation as you’re perpetually paying interest and rising monthly payments.
- You’re not addressing the real problem – Relying on your credit card to make ends meet monthly is not a solution to your money problems. You need to address the real issue of why you’re not able to cover your bills without your card.
Having a credit card isn’t necessarily a bad thing but you do need to exercise caution and care when using them to avoid future financial headaches.
For more great reading about credit cards check out these articles: