Credit cards are convenient financial tools that can help you build credit, earn rewards, and pay off debt. However, they can also be dangerous if used irresponsibly.
Fortunately, there are several steps you can take to use your credit card responsibly and avoid high-interest rates, debt, and bad credit scores. Here are five best practices on how to use a credit card correctly:
1. Pay Your Balance in Full Every Month
Using credit cards responsibly can build your credit, help you track spending, and earn rewards. But if you’re not careful, credit cards can also hurt your finances and lead to debt. The first step to being a responsible credit card user is paying your balance in full each month.
If you carry a balance from month to month, you will be charged interest, which can quickly add up. You may also have to pay late fees, which can affect your credit score.
In addition, you should never charge more than you can afford to pay back. This will help you avoid accumulating interest and ensure that you don’t exceed your limit, which can negatively impact your credit utilization ratio, determining how much credit you can access.
Another thing to remember is that you should never use a credit card for cash advances, as these are essentially loans, and start accruing interest right away. In addition, you’ll probably have to pay a fee each time you use the card. You should instead consider other options for getting quick cash, like asking friends, borrowing from family, or selling unused items.
If you’re unable to pay your balance each month, you should try to make a larger payment in the middle of the billing cycle to reduce your credit utilization. If you can’t afford to do this, reviewing your spending habits and cash flow is important to find ways to cut costs or save. In addition, you should always read your statements and bank messages to keep an eye out for minimum payments due and errors that could lead to overpayment.
2. Don’t Use Your Card for Cash Advances
Credit card cash advances come with hefty fees and charges. This is why most experts strongly discourage their use. If you need to borrow money, you have much better options.
You can learn more about fees, minimums, interest rates, and how payments are applied by carefully reviewing your credit card agreement. Most of the details can be found on your card issuer’s website, but you should always read through the document thoroughly.
Depending on your card, you may withdraw cash directly from your bank account using the card’s PIN number, request one in-person at your bank, or even write yourself a convenience check containing your borrowing limit and fees (if permitted). The key is not to fall into the trap of believing that your card is like a debit card or that it can be used as a substitute for cash.
A credit card is best used for large, necessary purchases, such as appliances and car repairs. These purchases often offer rewards or other benefits you can’t get with a debit card, such as extended warranties and purchase protection.
However, having an emergency fund set aside to cover unexpected expenses is important. That way, you can avoid using your credit card for cash advances in the future. In the event of a financial emergency, you can also consider alternatives to cash advances, such as using your card’s cash-back rewards or buying a prepaid gift card that can act like cash. Ultimately, the best practice is to use your credit cards wisely and keep them in good standing for years to come. That will help you build a strong credit history that can lead to lower interest rates, better lines of credit, and loan offers in the future.
3. Always Read Your Statements
Using credit cards responsibly is an important part of building your financial future. It can help you build your credit, make you more attractive to lenders, and allow you to access better lines of credit and loan offers. However, it’s important to remember that credit cards are powerful tools, and if you use them irresponsibly, they can damage your finances.
The first thing you need to do to be a responsible card user is to read your statements and bank messages carefully. Every month your credit card issuer will send you a statement that lists all the charges you made during that period. It’s important to go through that list carefully because there could be any number of errors in it — a merchant may have miscoded something, you might have made a duplicate purchase, or someone might have stolen your card information and used it for fraudulent purchases.
In addition, your merchant statement will provide a detailed breakdown of your payment processor’s fees for each transaction you process. This will help you keep track of all the fees charged to your account, so you can ensure you aren’t being overcharged. It will also inform you about any chargeback activity, which can be one of the best ways to spot fraud and remove it from your account as soon as possible. Lastly, it will notify you of any fees that are being changed. While some of these changes can be insignificant, others can add up quickly. If you’re unaware of these changes, they can cost you a lot of money over time.
4. Do Your Part to Fight Credit Card Fraud
Whether stolen, lost, or simply used by someone else, credit card fraud can be very costly for consumers. In addition to being billed for goods and services they never received, they may also find themselves in a debt spiral that can negatively impact their financial futures.
Fortunately, you can do your part to fight fraud by being vigilant and checking your card account and credit reports regularly for unusual or suspicious activity. By ordering one report per year from each of the three major credit reporting agencies and staggering your requests, you can help to make sure you are aware of any unauthorized charges on your accounts before they become too costly.
In addition to paying attention to your cards and bank statements for any charges you don’t recognize, you should consider using transaction alerts offered by many card issuers. These alerts will notify you as soon as your card is used for a purchase that exceeds a pre-set threshold.
Fraudsters often target credit cards by obtaining consumer financial information via hacking or other data breaches at merchants or financial institutions. In fact, recent massive breaches such as those experienced by Target have led to the theft of millions of card numbers and other personal information that can be used to apply for credit in another person’s name – known as application fraud.
In the United States, federal law limits your liability for unauthorized charges to $50, and numerous card issuers have adopted zero liability policies that protect consumers from any fraudulent activity on their cards. However, you must always check the terms and conditions of your cardholder agreement for the full details. And it’s best to avoid filing a dispute in the first place if you aren’t 100% certain that you did not authorize a particular charge. Doing so can actually lead to unintended consequences, including a blacklisting of your card.
5. Make Your Payments on Time
Credit cards are great financial tools but must be used responsibly. If not, they can do more harm than good, resulting in debt and affecting your credit score.
In order to avoid late fees, you should always pay your bills on time. Missing even one payment on a credit card could result in accumulating interest and can cause the amount you owe to grow significantly. It’s also important to set up reminders on your phone or calendar so you don’t forget about a credit card bill due date, especially if you have several cards. If you have trouble remembering, try setting up automatic payments using your bank’s online services or a credit card app.
Another important reason to pay on time is that your credit card company may share your payment information with the three major consumer credit bureaus, and falling behind on a card’s payments will negatively impact your credit scores. This could affect your eligibility for lines of credit or loan offers or even lead to account closure or bankruptcy.
It’s also important to consider whether your credit card has a grace period. A grace period is the window of time between when your bill is due and when you will be charged a late fee. If you don’t have enough money in your budget to cover a credit card payment before the end of the grace period, you can ask your lender to change your payment due date so you have a longer grace period. You can also use this extra time to make additional payments on your balance to reduce the amount you owe and possibly lower your credit card’s interest rate.