6 Tips for Using Credit Cards Wisely
Credit cards are in the wallets of more people today than at any other time in history. Many people obtained their first credit card or began using a credit card they’ve had for a while within the last few years as prices on everything from fuel to food have threatened today’s middle class. No judgment here—credit cards are incredible financial tools that offer the power to make purchases when you might not have the extra cash on hand, but prudent credit card management is important.
So, here’s some sage wisdom you can apply to your credit card use.
1. Create a sound budget.
You know your finances best—what can you reasonably spend? Credit cards shouldn’t be viewed as extra spendable cash. Instead, they’re great for creating a paper trail or proof of purchase. Credit cards are convenient financial tools that can help you build, boost, or re-establish your credit score to foster greater buying power in the future.
2. Don’t carry a balance from month to month.
Credit card issuers require minimum payments each billing cycle. Your minimum payment is calculated as a percentage of the available credit that you’ve used during the month, plus any balance that’s been forwarded. Unfortunately, most credit cards today have high interest rates—some are as high as 30% or more! That might not seem alarming at first glance. Any purchase you make that you pay off before the end of your billing cycle doesn’t incur interest. But if you can’t pay it off that quickly?
Let’s do some math.
For example, suppose you need a new household appliance. Here’s a breakdown of what a refrigerator purchase might look like if you put it on your credit card and pay it off before the end of your billing cycle vs. carrying a balance with a 29.9% interest rate:
If you pay off the balance before the end of the billing cycle:
- New refrigerator: $978.00
- Sales tax: 6.5%
- Total amount charged to credit card: $1,041.57
- You pay $1,041.57 before the end of your billing cycle, you’re not charged interest, and your available credit is restored.
- Amount owed: $0
If you carry the purchase as a balance for one month with accruing interest:
- New refrigerator: $978
- Sales tax: 6.5%
- Total amount charged to credit card: $1,041.57
- Interest: 29.9%, or $311.43
- Amount owed: $1,353
Your budget and credit rating could spiral out of control without sound credit card management, especially if you carry this balance for more than one billing cycle.
3. Shop at physical stores you trust (or at online vendors with robust security practices).
Credit card fraud remains a stark reality for cardholders. Card management includes being mindful of where you shop. You can minimize unauthorized card use and/or identity theft by presenting your card for purchases at trusted stores and online shops. Request the paper receipt when shopping in-store and save screenshots of payments made online.
4. Don’t open multiple card accounts.
It can be thrilling when you’re building credit to apply for every credit card pre-approval you receive. But opening multiple accounts isn’t good credit card management practices, and isn’t advised for several reasons, such as:
- It’s harder to track credit card billing cycles.
- Keeping tabs on payment amounts and due dates becomes complicated.
- Missed payments can add up fast with late fees, interest charges, and even over-limit fees.
Access to more credit than you need can entice purchases that quickly outpace your budget.
5. Keep your utilization rate low.
Your credit card limit and the amount of credit still available after purchases result in a percentage known as credit utilization rate or ratio. Keeping your credit utilization rate low helps you stay within your budget and maintain healthy credit scores. The main credit bureaus suggest using no more than 30% of a credit card’s limit. It’s also a good idea to monitor your overall credit usage and maintain less than 30% overall utilization between all available credit lines.
6. Don’t cancel a credit card simply because you no longer use it.
Another factor of wise credit card management is the length of your credit history. For instance, say you opened a credit card to build or rebuild your credit. You used the card as intended, always paid off your balance, and maintained a low utilization ratio. Your responsible use paved the way for an additional card within a few years (you may even receive pre-approvals within six months). If you apply and are approved for a new card with a better interest rate, a higher credit limit, or other improved benefits, you might be tempted to cancel that original credit card—but wait.
If you cancel your first card, you eliminate its credit history, too, and with it, your record of wise credit card management. Keeping the account open can have positive effects, whereas closing the account could negatively impact your credit score.
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