Credit cards come in handy—from booking a hotel or car reservation to paying for a large ticket item, using credit can make your life easier. Using your card wisely can increase your credit score, making it easier to receive a mortgage or car loan. Manage your credit poorly and you will pay—in the form of interest charges, late fees, and more. If you use your cards wisely, and avoid some of the common pitfalls, you can have all of the benefits of credit cards, and none of the drawbacks.
1. Keep your utilization under 30%. “Utilization” refers to the amount of credit you have available. Having a healthy utilization rate can help boost your credit score. Calculate your utilization by divining your total credit line by your balance. If you have a $5,000 credit line, and a $500 balance, your utilization is 10%. Utilization over 60% may negatively impact your credit score, and hurt your chances of securing other loans.
2. Pay on time: It sounds simple, but a single late payment can tank your credit score—and cause all of your cards to inflate their interest rates. Pay a few days early, and make sure your payment clears in plenty of time. Late payments can also trigger late fees of $39—making them an expensive error.
3. Pay more than the minimum. Interest fees are added to your balance every month. If you only make minimum payments, you will take years to pay off a balance—and you will pay thousands extra. Make the effort to pay a little extra each month, and watch your balances shrink more quickly.
4. Pay in full. If possible, get into the habit of paying in full each month. Not only will you avoid interest and fees, you will give your credit score a boost—by having an open credit line, paying on time, and maintaining low utilization.
5. Look for a card with some perks. If you are going to use a credit card, look for one that has some benefits that appeal to you. You can earn miles, rebates, or gift cards by using different cards. Be careful, though—don’t be so tempted by rewards that you don’t read the fine print—make sure the interest rate and fees are reasonable, or take your business elsewhere.
6. Shop around for a low interest rate: Make sure you review your interest rate on every statement you receive—they have a funny way of creeping up when you aren’t watching! Interest costs you money every month when you carry a balance, so be sure to shop around. If you do have a higher rate card, call your provider—you may be able to negotiate a lower rate.
Make sure your credit cards are working for you—and that you aren’t making some costly errors. Improving your credit habits today can help your long term financial outlook.