Tuesday, March 21, 2023

How To Properly Use Your Credit Card

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How to Properly Use Your Credit Cards and Understand Proper Credit Card Utilization

There are other ways to borrow money. Some people go to a payday lender. Some use the title to their car to get a loan. Some people pawn things.

These other ways to borrow are expensive. They almost always cost more than going to a bank, a credit union or a store. Some people have problems with debt after using these ways to borrow. The charges can be very high. It is hard to pay the money back and get out of debt.

Only Paying The Minimum Balance

It’s tempting to send in minimum monthly paymentsoften $15 to $25when you’re under financial duress. Don’t do it. High-interest rates charged by credit card companies will keep the bill growing every month. Instead, send the highest payment you can afford and reduce spending in other areas to focus on paying off the debt. It might be worth going without extras like the newest smartphone or latest fashion if it means you’ll sleep easier at night, knowing you’ll soon be debt free.

It may not feel like you’re saving money when you increase credit card payments, but you are. Depending on the interest rate, you’ll save an average of 10% to 29% per year in interest on any balance you pay off. For example, if you pay off an extra $1,000 this year, you’ll come out $160 to $290 ahead, depending on the rate.

Money is probably already tight if you’re already in debt, so freeing up extra cash will give you some breathing room for the long haul. Whether you use this money to accelerate debt payments, start an emergency fund or invest in retirement. The power of compound interest will start working in your favor instead of against you.

What Can You Buy With A Credit Card

Its safe to assume that nearly every chain retailer, restaurant, and service provider in America accepts credit cards to some degree. Most small businesses do, too, though theyll often have minimum purchase requirements for customers paying with cards.

Certain products and services may be harder to pay for with credit cards. For example, you can sometimesbuy a car with a credit card, but it usually depends on the dealers policies.

Things you may not be able to pay for with a credit card include :

  • Money orders: Using a credit card to pay for a money order isnt usually allowed .
  • Stocks: There may be roundabout ways to buy stocks with a credit card, but, again, its probably not in your best interest.
  • Casino tokens: Casinos dont typically accept credit for casino chips. Thats why youre apt to see ATMs all over the place.
  • Your mortgage/rent: Some landlords accept credit cards for rent, but few do for mortgages. You may be able to use Plastiq for these things, but youll be charged a processing fee, so it may not be worthwhile.

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Maintain A Low Utilization Rate

Your credit card’s balance relative to its credit limit is also an important factor in your credit score. Credit scoring models use the balance and credit limit as they appear on your credit report to calculate your . Low utilization is better for your credit.

Limiting your card use, especially when you have a low credit limit, could help you maintain a low utilization rate. If you use your card often or for a large purchase, you can lower your reported balance by paying down your card’s balance before the end of your statement periodabout 21 to 25 days before your bill’s due date.

There’s no perfect utilization rate, but aim to keep it below 10% for the best credit scores.

How To Use A Credit Card To Earn Cash Back And Rewards

How To Properly Use a Credit Card to Boost Your Credit ...

Earning rewards from a credit card is the fun part. But first, you should consider what your top spending categories are, then pick a card that will provide the best returns for you. Everyone’s spending habits are different some people may spend a lot on travel, while others only spend on groceries or takeout.

Also Check: How To Get Netflix Free Trial Without Credit Card

What Is $0 Fraud Liability

Under the Fair Credit Billing Act , you can only be held liable for up to a maximum of $50 in the event of fraudulent charges on your credit card account, as long as you report it within 60 days. However, a number of major issuers, including American Express and Chase, guarantee zero liability with the caveat that you have to act quickly when something’s not right.

Reasonable protective measures include:

  • Contacting your card issuer as soon as you realize your card or device on which your account information has been added has been lost or stolen
  • Advising your card issuer if you suspect that your account is being misused
  • Protecting your personal information and security codes from others, including your family and close friends
  • Practice safe computing
  • Avoid Recurring Payments On Your Credit Card

    A recurring payment lets a company put charges onto your credit card bill automatically. This is also sometimes known as continuous payment authority .

    But its not as safe as a Direct Debit from a bank account.

    To cancel a recurring payment, contact your card provider and tell them you withdraw your permission for the company to take payments.

    If payments are taken after that, the card provider must refund this money to you along with any related charges.

    But you have to let them know no later than the end of the previous working day before your bill is due.

    Recurring payments are best avoided because of the danger you wont realise how much is coming out of your credit card account, and you might go over your credit limit accidentally, leading to charges.

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    Rule #: Understand How Interest Is Calculated

    Contrary to popular belief, interest isn’t calculated based on the remaining balance after making a minimum payment. In reality, issuers calculate interest based on your average daily balance, calculated by taking your card’s APR and dividing this number by 365.

    For example, assume you have a statement balance of $1,000 and make a payment of $800 on the due date. You’ll be charged interest on the remaining balance of $200 and lose your grace period. In the new billing cycle, any transactions will begin accruing interest immediately. The grace period where no interest is charged only applies if you pay your balance in full by the payment date.

    Do You Want To Build Or Rebuild Credit

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    If you’re just beginning your credit journey, or looking to repair poor credit, it can be a little more difficult to find a card that fits your needs that you’ll also qualify for. Check out secured cards or cards for building or rebuilding credit. If you have no credit history, a great choice is the Petal® 2 “Cash Back, No Fees” Visa® Credit Card, which doesn’t include many common credit card fees. If you do have credit history, it will be reviewed and considered as part of the application process.

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    What Can I Use A Credit Card For

    You can use your credit card to make payments in the same way you would use a debit card or cash. What’s different is that the money does not leave your account straight away, as it would with a debit card. Instead, you have a set period of time from the date of your purchases before you will receive a statement telling you how much you need to repay. Then you have to repay the credit card provider . So you are paying on credit.

    The credit card issuer will usually give you between 45 to 56 days to pay them back. It’s always better for you to pay off the balance in full, but you can do it in instalments.

    Try to always pay off at least the minimum amount due. This will be shown on your credit card statement. The minimum amount is the sum you need to pay to avoid extra charges. Even if you cannot pay off your whole credit card bill you should pay off the minimum amount on time.

    Avoid paying interest or late fees by setting up a direct debit from your current account. That way, you also will not forget to pay.

    Use Your Credit Card Statement As A Monthly Financial Health Check

    Regularly reviewing your statement allows you to better understand your monthly expenses while also protecting against fraud or errors that might damage your credit.

    When you get your statement, check to make sure that you recognize all of your charges, and while you’re at it, take stock of how you’re using your credit. If meeting minimum payments every month is becoming a struggle, you might want to consider limiting your credit card usage in the next month to help you get back on track. But if you’re easily paying your balance in full, then you can request an increase to your credit limit, which may improve your credit score.

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    Protect Yourself From Fraud

    Now that you’re monitoring your account for suspicious activity, you’ll want to know what to do in case you spot any. Review your bank’s privacy and security policies to find out how you’re protected in case your credit card number is stolen. Learn how to protect yourself from fraud and what to do if you become a victim. A few simple tips: Never give out your credit card number over the phone unless you initiated the call, memorize your passwords and PIN numbers and keep them in a safe, secure location and check your account often to monitor for unusual activity. You now have the tools to start smart with your first credit card.

    Build Your Credit Score

    How To Properly Use Your Credit Cards

    Here are a few tips to build your credit score:

    • Pay your bills on time: Successful payments are recorded in your credit report and contribute up to 35 percent of your credit score.
    • Keep an eye on your credit utilization rate: Credit utilization rate, one of the biggest factors impacting your credit score, is calculated by taking the credit and loan balances you currently owe and dividing them by the total limits of your credit lines. The optimal is less than 30 percent. For example, if you have one credit card with a limit of $1000 and you currently owe $250, your credit utilization rate is 250/1000 . Two ways to keep your credit utilization ratio low are by keeping credit card balances low and extending your credit limits. Use both tactics when you are confident that you can manage your credit spending and payments carefully.
    • Keep your credit card open: Even if you pay off the entire balance of your card, keeping a card open can extend the age of your credit card and of your credit history. The age of your credit, in turn, provides 10 percent of your credit score. But check the card’s terms and continue to monitor your monthly statements, just to be sure that there are no penalties attached to keeping a zero balance on a card.

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    How Credit Monitoring Services Work

    can provide you with early notice of potential fraud on your credit report, so you can take steps to protect your personal information. While these services can’t actually prevent identity theft, they can keep you informed so you can take action if you notice something is wrong.

    • Hard inquiries on your credit report, such as someone applying for credit in your name
    • New accounts opened in your name
    • Balances and payments on your credit products
    • New address or name changes to your credit file
    • Public records, such as bankruptcies
    • Personal information on the dark web, such as your social security number, email address and passwords

    When you sign up for credit monitoring, you’ll receive alerts and resources to help you identify and protect against possible theft, but these services can’t actually guarantee fraud prevention. At best, they keep you instantly informed so you can take action as you notice something is off.

    IdentityForce® tops our list of best credit monitoring services. Both IdentityForce® UltraSecure and UltraSecure+Credit offer the most extensive security features that monitor your information on a variety of sites and services, including the dark web, court records and even social media. You receive alerts for potential fraud on your bank, credit card and investment accounts, as well as the use of your medical ID, social security number and address.

    See our methodology, terms apply. To learn more about IdentityForce®, visit their website or call 855-979-1118.

    When Not To Use A Credit Card

    Paying with credit cards isn’t always better than paying with cash. Retailers honor credit cards because they want to make it easy for you to shop there. But the merchants still have to pay the major credit card companies a portion of every sale in the form of a transaction fee. Since a cash sale means more to the retailer’s bottom line than an equivalent credit sale, some retailers give discounts for the privilege of immediately taking your cash. On a big item, like a furniture set, for instance, the difference could be substantial. However, you’ll forego the consumer protections offered by credit cards.

    There are other reasons when paying with credit isn’t better, and they have to do with you and your spending habits. Using a credit card may not be right for you if:

    • You can’t pay your credit card balance in full and on time: If this tends to happen, stick with the debit card to avoid falling into credit card debt and incurring interest charges.
    • You tend to spend more than you can afford: Paying with debit will limit you to spending money already earned.
    • You can only get a credit card with a low credit limit and you have a hard time staying under the balance: Exceeding your credit limit results in costly fees, and doing this can also put a dent in your credit score.

    Also Check: Credit Card Reconciliation Process

    Avoid The Minimum Payment Trap

    The minimum amount you need to repay on your card each month is often quite small. But paying just this amount will cost you a lot in the long run.

    You could be making repayments for years and end up paying more in interest than the original debt.

    Lets take an example of a debt of £1,000 on a credit card with 16.9% APR.

    The minimum repayment for this card is 2% of the balance, or £5 whichever is more.

    The first payment will be £20, but this figure will fall as you repay the balance.

    The table shows how much you could save if you repay the same amount every month on a £1,000 balance.


    Remember, if you dont pay off the whole bill, youre likely to be charged interest on everything on the card. This will include new things you bought that month.

    So, if you keep spending on that card, youll end up paying even more.

    If you feel like your repayments are getting out of control, or youve been contacted by your card provider, help is available.

    Lenders are required to suggest higher affordable repayments. If you dont respond, or ignore the issue, and the situation persists for more than 36 months this could lead to your account being suspended.

    Understand How Credit Cards Work

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    Credit cards provide a revolving line of credit .

    When you apply for a credit card, the bank looks at a number of factors, including your income, debt, and credit history. Itll then decide whether to extend you a line of credit and how much of one. This is the maximum amount you can spend on your card before paying some of it off.

    How swiping a credit card works. Image credit: Visa

    Every time you swipe your card at a store, hotel, restaurant, or website youre borrowing money from the card issuer and using more of your credit limit.

    Insider tip

    in several ways. Most notably, when you swipe, youre not withdrawing money from your bank account youre borrowing money from the credit card company. Thats why credit cards help you build credit, and also why they can be an easy way to fall into debt.

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    Build Good Credit Habits From The Start

    Your first credit card can be a step toward building a strong financial future and establishing an excellent credit scoreor it can lead to a mountain of debt you struggle to repay for years. Before using your first credit card, here are some tips to guide you along the right path.

    How To Use Credit Cards: 6 Simple Rules To Follow

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    When used correctly, credit cards can be an easy ladder to better credit scores and valuable rewards.

    But, when used incorrectly, they can be a direct chute to debt and misery.

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