The 8 cardinal rules of using a credit card

Credit cards offer many benefits, but only if you use them correctly.

Using credit cards as “free money” can lead to financial destruction. Living with credit card debt can seem overwhelming, and get out of debt may seem impossible. But credit cards aren’t inherently bad. If you use them correctly, they can boost your credit score, save you money on everyday purchases, and help you travel for free, for example.

Using the simple rules below, learn to use your credit cards responsibly.

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1. Pay your credit card bill on time

Know the due date of your credit card bill. Paying your bill a day late is a $ 25- $ 35 error. Interest also accrues on the balance immediately and daily. The longer you wait to make your payment, the more interest you will have to pay.

If you’re used to late payments, the credit card company may increase your APR as well. According to the Credit Cards Act of 2009, credit card companies can increase your interest rate after your payment is more than 60 days late.

2. Pay your credit card bill in full

You can avoid interest charges if you pay off your balance in full within the 25-day grace period. It’s like paying in cash; you only spend what you have. If you only pay part of the balance, however, the balance accumulates interest. If you let the balance get out of hand, the debt can snowball and cost you a lot more than the original balance.

While paying the monthly minimum allows you to meet your contractual obligations and does not affect your credit score, interest will accrue on the remaining balance. For example, paying the minimum payment (assuming a required minimum payment of 2%) on a balance of $ 5,000 with an interest rate of 19% costs $ 4,985 in interest and it takes 8 years and 4 months to refund in full. Your $ 5,000 purchase almost doubles in cost.

If you can’t pay your balance in full, pay as much as possible to reduce the interest you pay.

3. Keep your credit utilization rate low

If you leave a balance on your credit cards, keep it low. Your credit utilization rate represents 30% of your credit rating. Your credit utilization rate is the total of your credit card balances divided by your total available credit. If your utilization rate exceeds 30%, your credit score may drop.

Keep in mind that your usage rate is a combination of all of your credit card balances. If you max out one credit card (which we don’t recommend) but another has a low balance, it may even be depleted for the sake of your credit score. For example, if a credit card has a limit of $ 3,000 with a balance of $ 2,000, but you have another credit card with a limit of $ 5,000 and a balance of $ 200, your rate. usage would be 27.5%.

4. Only charge what you can afford

If you don’t have the money to pay the balance in full, don’t charge it. Many people use credit cards as a means of buying wants rather than needs. Instead, use it as a way to protect big purchases or temporarily cover yourself with the knowledge that you can pay the bill in full within the grace period.

Even if you think you are getting a good deal that you should jump on, the interest charges may outweigh the savings from the rebate. Think long and hard before loading something you don’t need and can’t afford right now.

5. Read your statement every month

Errors show up on credit card statements all the time. Check your statement for duplicate charges or subscriptions you canceled. Reviewing your statement each month also helps you understand where your money is going. You can then refocus your expenses if necessary.

Checking your credit card statement each month can also help you spot fraudulent charges. Although many credit card companies detect these charges before they reach your statement, it’s always best to check.

6. Choose cards that suit your needs

Know why you want a credit card. For example, if you travel frequently and can use airline rewards, an airline miles credit card works well. If you never fly, an airline miles card won’t do you much good. Instead, find a card with perks that you’ll use. For example, some credit cards offer travel benefits, while others offer cash back or credit rewards on statements. Think about what is most important to you.

If you know you’ll be carrying a balance on the credit card, forget about the rewards. Instead, look for a 0% introduction by APR credit card. If you pay the balance before the end of the promotional period, you will not pay interest. Just be sure to read the fine print so you know when the promotion period ends.

7. Avoid cards with annual fees, in most cases.

You only need to pay an annual charge for a credit card in unique circumstances. If you know you’ll earn rewards that offset the annual fee and use them, go for it. Otherwise, look for cards with no annual fee that still offer decent rewards.

8. Don’t close old credit card accounts

The average age of your credit accounts affects your credit score, and the older the better. If you close every credit card after you’ve paid it off, you reduce the average age of your account, which hurts your credit score.

As long as your credit card doesn’t have an annual fee, keep it open. If you do not want to use the card, keep it in a safe or give it to a loved one.

Use your credit cards responsibly

Credit cards can be great when used correctly. They provide protection for large purchases and eliminate the need to carry cash, especially while you are traveling. Knowing how to use them without spending too much can help you stay financially strong.

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