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Credit cards are essential credit building tools that are critical to our ability to rent homes, cars, and even secure loans.
However, some may see credit cards as a way to pay for items they may not yet be able to afford.
If you’re looking into applying for a credit card and need a solid foundation of financial advice to support you once you’re approved, here are a few excellent tips on how to use credit cards wisely.
Table of Contents
How To Use Credit Cards Wisely
Use A Credit Card To Build Credit, Not Get Into Debt
I believe that personal credit cards should only be used to build credit.
Don’t you dare use them to rack up thousands of dollars in debt!
Credit card debt is a huge trap that many people fall into.
They have high interest rates and low monthly payments.
Many people end up getting stuck with ten, twenty, or even thirty thousand dollars in debt!
The average American family has $6,270 in credit card debt. This can be a huge burden, and a tremendous waste of money.
On the other hand, a high credit score really comes in handy, and the first step to do that (although there are other options that may not be as effective) is to get a credit card and treat it like a debit card.
That means that you pay off 90% of the balance every month.
- Read now: Learn how to create your own debit card
I’ll explain why you want a tiny balance later.
For those who may have low credit or no credit and need to establish a reliable payment history, a secured credit card or a student card from a credit union or institutional issuer may be the best option.
Avoid retail store credit cards.
All you do is apply, keep that line of credit open to develop a history of on-time payments, and keep your balances low.
This will grow your credit score.
Then, keep a watchful eye on your credit on multiple credit bureaus to ensure you’re making real progress as well as flagging any instances of identity theft or fraudulent charges made to your credit card account that are affecting your credit rating.
Borrow Only What You Can Afford To Pay Back
Have you ever heard the wise investing advice, never invest more than you’re willing to lose?
We can modify this statement to say, never spend more than you can afford to pay back!
Although you should be using your credit card on small purchases that you would be paying upfront in your day-to-day life, some people see credit cards as a way to afford items that are typically out of their budget.
This typically results in a snowball effect, with borrowers going into credit card debt because they’re buying what they can’t afford.
They are using their credit cards to afford things because they’re going into debt, and spiraling further and further out of control.
Before you purchase something, ask yourself, do I have enough cash flow to buy this now or in the immediate future without my credit card?
If the answer is no, don’t use your card for it.
Another helpful tip?
Avoid using your card for a cash advance.
These may be convenient if you’re struggling to pay bills, but they’re just as tricky as other short-term loans and can easily result in a credit card balance you can’t pay off.
Sometimes people use credit cards when they lose their job or when personal tragedy strikes.
It’s better to ask a family member for a loan or to find another way.
It may hurt more in the short-term, but almost anything is better than paying those 15%+ interest fees that most credit cards have.
Pay Your Bills On Time
It can be easy to say, “I’ll pay this later” when we fall behind on credit card payments and anticipate being able to catch up.
But late payments on your credit card after your billing cycle are no joke.
The consequences of paying your credit card bills late are twofold.
Arguably the biggest consequence of paying late is that these late payments can be reported to credit bureaus.
Given that your credit report is designed to be a reflection of your reliability, late payments will only reduce your score and damage your credit history, which is quite serious.
Secondly, late payments can result in late fees and higher interest rates (on top of annual fees), which only make it harder to clear up all the credit card debt that you owe.
As per the previous point, don’t spend more than you can afford to pay back if you aren’t able to pay cash.
But what else are you to do if you don’t want glaring credit card statements and poor payment history?
You can avoid missing payments by setting up alerts on your personal calendar and through your app.
You can even set up automatic payments so that you never miss a bill and rack up credit card interest debt, even if you forget.
You could also use a financial app to take care of any existing debt you may have now!
- Read now: Learn why so many people use Tally
Carry Credit Card Balances Responsibly
This concept can be confusing for those who are just now applying for a credit card, so it’s important to dive into what carrying a credit balance means.
Put simply, your credit balance is the amount that you owe at the end of the month.
Some people can’t always pay their balance in full, which means that the remaining balance carries over in the form of debt.
For credit building purposes, carrying a small balance is beneficial.
Since you always need to be making monthly payments to build a payment history for your credit, this is helpful.
For maximum credit benefits, I recommend carrying a balance as low as possible.
Always less than 10%, but ideally less than $100.
For example, if your credit line is $1,000, then never have a balance above $100, which is 10% of your credit line.
Ideally your balance will be $30-$50 per month, so that you don’t pay much or anything in interest.
This was advice given to me by an elite credit industry professional.
In my own personal testing, I’ve also found that carrying a small balance boosts your credit scores, over having no balance at all.
Keep A Low Utilization Ratio
Credit utilization refers to the amount of credit that you have used in comparison to how much available credit is given to you by lenders.
Let’s keep things simple and imagine that you currently only have one credit card.
Should you find yourself unable to pay your full balance, you can calculate your credit utilization by dividing the amount you owe by your credit limit.
Since this is a credit score factor, you always want to keep your credit utilization ratio below 10 percent.
But doesn’t this mean that I still have credit card debt?
It does, but keeping your credit utilization under 10 percent demonstrates to lenders that you’re a responsible individual that aims to pay their credit card bills and still has a considerable amount of credit available.
If you have multiple credit cards, you can transfer credit card balances to not have too high a utilization ratio on any one card.
For example, if one card is maxed out, you can transfer some of the balance to two of your other cards.
This can help you save money too, if you’re transferring the balance from a card with a high interest rate to a card with a lower interest rate.
Always Pay More Than The Minimum Balance
The minimum balance or minimum payment is the smallest amount of money that you can pay off on your card in order to avoid late fees and late payment records.
However, the minimum balance should never be your goal.
Credit card companies purposely set insanely low minimum balances that may encourage their borrowers to only pay that amount.
However, the amount the issuer states is rarely ideal.
If you underpay, this means that you may still have a great deal of debt remaining, which grows as the existing high interest rates still apply to it, even if late fees don’t.
A great rule to follow is to always pay more than the minimum balance, no matter what your card issuer says, with a focus on paying most of the balance each month.
If you can’t, aim to keep your credit utilization ratio under 10 percent and pay the remaining balance when you’re able to!
If you’re in doubt, just follow the expert tips above!
You can also supplement your credit-building journey with personal finance tips from the blog DigitalHoney.money to make sure that you’re improving your financial health in all areas.
There are the best tips for how to use credit cards wisely.
Credit cards are not loans, but many people may treat them as such.
If you want to build credit responsibly and avoid common pitfalls and massive finance charges, use the tips offered above to make sure you’re making all the right credit moves along the way!
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I have over 15 years experience in the financial services industry and 20 years investing in the stock market. I have both my undergrad and graduate degrees in Finance, and am FINRA Series 65 licensed and have a Certificate in Financial Planning.
Visit my About Me page to learn more about me and why I am your trusted personal finance expert.