Credit cards greatly impact your life, but unfortunately people aren’t taught much about them. In school, you don’t learn about the ups and downs of credit scores, the dangers of interest rates, and the caution you should use when applying for and using a credit card. This lack of education often leads to credit mistakes and piles of debt. If you feel like your knowledge of credit cards is lacking, or you’d just like a guideline to help you navigate the treacherous waters, check below for a list of seven rules you should follow.
Don’t Use Your Cards as Free Money
The biggest mistake you can make is viewing your allowed balance as free money. Just because a credit card company gives you a $4,000 credit limit doesn’t mean you have an extra $4,000 to spend. Technically, yes you could spend that money, but it’s a very dangerous thing to do, and that money is certainly not free. Using your cards as extra cash, with no way of paying off the balance, will land you in debt, weighed down by interest payments. The harsh reality that many don’t think about when spending is that $4,000 can easily become $10,000 if you’re unable to pay it back in a timely manner.
Never Forget Your Payment Date
Logging in to pay your credit card bill seems like a simple act, but when you have dozens of other bills to pay each month, it’s easy to lose track of one or two. To avoid late fees, set alerts on your phone or create a payment calendar as a reminder of what is due and when.
Pay Your Balance
It’s not bad to use your card. In fact, if you have a rewards card, it’s smart to use it. However, it’s important to remember rule number one when doing so. Never spend money you don’t already have. When it comes time to pay your credit card bill each month, you should be prepared to pay the entire balance. Not only will this save you from drowning in debt over the years, it will also help improve your credit score.
Don’t Miss Out on the Sign-Up Bonuses
Many cards offer sign-up bonuses to new customers. Often times these bonuses are given in the form of cashback rewards when you spend a minimum amount over the course of 1-3 months. The easiest way to hit the minimum without putting yourself in financial peril is to pay your regular monthly bills with your new card. You should also buy groceries and gas with it, and any extras you normally spend on entertainment or dining out should also be put on the card. These expenses were already expected and will not hurt your wallet in any way as they help you reach your goal. Don’t make the mistake of getting a new card and missing out on sign-up bonuses; that’s like missing out on free money (yes this time it’s actually free).
Pay Attention To Rewards
Not all rewards cards are the same. Take Discover for instance; they give cash back rewards every time you use their card, but they also have special 5 percent cashback opportunities that change every quarter. Bank of America lets you choose which expenses (groceries, dining, etc) will earn you 3 percent back, meaning all other purchases earn you less. It’s important to pay attention to the cards that give you the most rewards in each situation and use them accordingly. Doing so will give you the most bang for your buck.
Keep Your Utilization Under 30 Percent
If you’re concerned about your credit score, you should be careful how you distribute expenses among your cards. Your utilization ratio (the percentage of your total allowed balance that you’ve used) plays a huge role in deciding your credit score. Your goal is to keep that ratio beneath 30 percent. Tally up the credit limits of all your cards. If the grand total is $20,000, then $4,000 in accumulated debt would put your ratio at 20 percent if that $4,000 is spread among multiple cards. However, it’s not a good idea to put that entire $4,000 on one card, even if your other card balances remain low. Why? Because, now you’ve used more than 30 percent of that one card’s balance. Because of that debt, even if you have a zero balance on your other cards, creditors will see you as a risk. And that will affect your credit score.
Avoid Convenience Fees
While it’s smart to use a rewards credit card as much as possible (as long as you can pay the balance) to gain more cashback, it’s not worth it when there’s a convenience fee for using the card. Most credit card convenience fees are 3 percent, so they will negate the cashback bonus and wind up costing you more in the long run.
These rules will help you avoid the temptation to abuse your credit cards and rack up massive amounts of debt. They will also help you receive the maximum rewards. If you’ve made mistakes with credit cards in the past, forgive yourself (it’s a common mistake). From this point on, do your best to pay as much towards your debt as possible, and start using your cards with these rules in mind.