Things You Need To Know About Credit Cards
There are some important points you need to keep in mind before applying for and using a credit card:
- The credit card provider will carry out a hard credit check when you apply. This will include checking your credit file. If youve got a good credit rating, this will improve your chances of a successful credit application. It could also give you access to cards offering the lowest interest rates and/or promotional offers. A hard credit check will show up on your credit report and will have the potential to affect your credit score.
- Some credit companies will perform a soft check before you apply. This type of credit inquiry will have no impact on your credit rating and will not show up on your credit report. It provides an indication of whether your credit application will be successful.
You can check your credit score for free by using the following websites:
Travel & Emergency Assistance And Insurance
This is a benefit Ive yet to use, but two of my cards offer significant travel insurance and support.
For example, my Citi card will reimburse up to $1,500 per person if a trip Ive planned is cancelled or interrupted for reasons such as illness or injury, death of a family member, natural disasters that stop travel for at least 24 hours, and more.
They also offer emergency assistance while abroad, such as 24/7 help with emergency travel arrangements help locating lost luggage finding and dispatching local translators, doctors, dentists, etc. to your location and much more.
Use A Debit Card If You’re Trying To Control Your Spending
You can use a debit card for everyday purchasesespecially if you think that using a credit card all the time would lead you to overspend. “I suggest using debit cards for your everyday expenses except in high-risk situations,” says Vanessa Perry, credit expert and owner of Impeccable Credit Services.
It is much easier to track how much money is going in and out on a debit cardchances are, you know how much is in your account and how much you’re allowed to spend. If you’re not careful, a credit card can enable impulse buying because it gives you access to money you don’t have. You can quickly fall into credit card debt and lose money on high-interest rates and late payment fees if you don’t manage your spending properly. If you’re more prone to mindlessly swiping your credit card online or in person, stick to using your debit card.
“Treat your debit card like cash,” says Jamilah N. McCluney, financial advisor and strategist at Black Wealth Financial. “Do you have the money in your checking account readily available to cover your purchase? If so, swipe away.”
You could also get a charge card, a type of credit card where you have to pay your statement in full every monththis is more similar to a debit card, and will help you stick to spending within your means while helping you build credit.
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Transfer The Remaining Credit Card Balance
Now that youve stopped using a credit card and have a solid budget and are using cash, developing a smart strategy to pay off the debt is key.
A balance transfer card could be an option for attacking your remaining debt on the card, says Michael Fairbourne, financial educator at TD Ameritrade. In fact, the strategy could save you money in the long run.
Its definitely worth looking intoI realize youre using another credit card to get out of a credit card issue, but you need to be mindful and not use it for other purchases, Fairbourne says. This strategy will help you save in interest, only if you dont keep spending on the new line of credit.
Some balance transfer cards offer 12 or 18-month promotional periods of no interest on balance transfers. While shopping for a card, be sure to consider any balance transfer fees you might incur while completing the transfer.
If you dont qualify for a balance transfer card and have multiple card balances, consider transferring the balances to a card with the lowest interest rate. In doing so, youll save money on interest and have an easier time tracking your progress, since all of the debt will be consolidated on one card.
Another option is to consider a personal loan for debt consolidation. Personal loans typically have much lower interest rates than credit cards. If you do opt to use this method, be sure to not fall into the trap of paying off your cards with the loan and then continuing to charge purchases on them.
Use A Credit Card For Any Recurring Payments
Any recurring payments you have such as subscription services that renew every month or year like Netflix, Amazon Prime, or Spotify are good to put on your credit card, especially an older one that you no longer use as much.
Recurring payments will keep that line of credit open so you can continue to maintain or increase your as long as you make payments on time. Make sure you check your credit card statements so you know which subscription services you’re being charged foryou can waste a lot of money on subscriptions you no longer use or forgot you signed up for.
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Is A Credit Card For Me
If you already struggle with managing your money or you think you might be tempted to overspend, its important to avoid getting a credit card.
Are you confident about managing your spending and being able to clear your balance every month? Then a credit card can be a good way to buy what you need now and pay for it each month.
Fact: Your Balance Has More Than One Interest Rate
Your account may include balances with different interest rates . And that points to another good reason to pay more than the minimum due: When you do, your card issuer has to apply any amount above the minimum to the balance with the highest ratewhich can help you reduce that higher-rate debt more quickly, saving you money, according to Experian.
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Rule #: Keep Your Balances Low By Only Charging What You Can Afford
In addition to making on-time payments, it’s essential to keep your balance low relative to your available credit limit. There are two main benefits to maintaining a small balance:
- Low balances help increase your credit score.
- You’re more likely to pay off your balance in full and on time.
Many factors determine your , but a significant portion comes from credit utilization. In other words, this is the ratio of what you owe to your total credit limit. For instance, if you have a credit limit of $1,000 and charge $500 to your card, your credit utilization would be 50%.
While there’s no clear definition of your credit utilization, experts believe that you should keep it under 30%. Anything higher than that can decrease your credit score. To achieve a low credit utilization ratio, you should typically charge less than you can afford. By keeping a low balance, you minimize the chance that you’ll spend more than you can pay off at the end of the month.
Finally, don’t view your credit card as an extension of your budget. You should never charge more than what you can currently cover in your bank account. It’s tempting to spend ahead based on what you know you’ll get paid, but it’s a bad practice. If you lose your job or run into an emergency, you won’t be able to cover those charges. People don’t intend on having credit card debt it builds slowly and becomes a vicious cycle that becomes hard to break.
Its Great For Accounting Records
Its hard to keep up with receipts, but if youre sticking to a budget, doing your own taxes, or just making sure you dont get overcharged for anything, then you need to keep track of those slips of paper. If you use your credit card, however, you have a built-in list of everything youve purchased. You can sign on to your bank account online and see what youve spent over the past month to make sure youre still on budget. You can double-check your bank balance and make sure there was no unauthorized spending. You can do all of thatand you dont have to keep track of anything!
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Know How Your Card’s Interest Is Calculated
Interest charges can make everything you buy with your card more expensive if you carry a balance from month to month. When you open a credit card account, be sure you understand what the APR is and how interest accrues on purchases.
Remember, you can pay off purchases interest-free during the grace period. Also, be aware that if you have balances with different interest rates, your payments may be applied differently. For example, say you have one balance at a promotional 0% APR and another at the regular purchase APR. Anything you pay over the minimum would be applied to the balance with the highest APR first.
Analyze Your Spending Habits To Maximize Your Rewards
Take a look at the past few months of your spending and categorize it as best you can. Ask yourself the following questions: Do you spend a lot on gas and groceries? How often do you travel? Can you put work-related purchases on a credit card and then get reimbursed by your company?
Once you figure out which categories you’re spending the most in, start researching different credit card options that fit your needs. After analyzing your spending, you may find that you want to use two credit cards to maximize rewards. However, while juggling cards can help you earn more rewards, don’t get so distracted you end up spending more than you usually would.
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How Many Credit Cards Is Too Many
Dont overextend by signing up for too many credit cards at once.
Some people happily acquire credit cards solely for welcome bonuses and then cancel the cardoften before the annual fee charge arrives after one year. This is known as churning-and-burning. Aside from the difficulty of keeping track of all this activity, theres the added drawback of how it can affect your credit score. Theres also the possibility that even if your credit score remains solid, opening too many accounts in a short amount of time could result in your bank denying you a new card.
Before signing up for too many cards, consider what each card can offer . Weigh the available bonuses against any card already in possession before making a decision. Dont get seduced by bonusesthink about what you need.
Reimbursement For Theft Or Damage
If all of the above perks arent enough, many cards offer Purchase Protection benefits, such as guarding against theft or damage. No joke. My Discover card will pay up to $500 for a stolen or damaged item for up to 90 days after purchase, and my Citi card will cover up to $1,000 up to 120 days after purchase. Some limitations obviously apply, butâagainâhow awesome is that?
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A Credit Card Is Safer To Use For Online Shopping
Use your credit card for online shopping so you don’t have your debit card information all over the internet. “Chip-enabled cards are very good at deterring in-person fraud but that doesn’t help you online, and that’s where most of the fraud has gone,” says Ted Rossman, senior industry analyst at . Check your browser and shopping apps to make sure your debit card isn’t saved as the preferred payment method and add your credit card insteador you can delete both to make it harder for you to overspend online.
Find A Rewards Structure That Meets Your Needs
Earning any type of rewards is better than nothing, but to get the most out of your credit card, youll want to ensure youre earning the most rewards you can on the types of purchases you make most often. Balancing this with a type of rewards you value and are easy to redeemcash back, miles or pointsis also important.
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To Build Your Credit History
Just about every adult has a credit profile, which is kept by credit reporting bureaus. This profile contains information about every loan you’ve applied for, held, and paid. All of that information makes up your credit score, which is a numerical representation of your credit profile.
Your credit score is positively affected by things that show a history of using credit responsibly, such as a history of on-time payments, having held multiple accounts, not having too much debt, and having held access to credit for a long period of time. On the other hand, it’s negatively affected by things like missing a payment or being late, or not having much history of holding credit.
When you use and pay a credit card every month, that adds another positive data point to your credit profile, which, in turn, helps build and raise your credit score. When it comes time to apply for a major loan like for a car or a mortgage, you’ll be more likely to be approved at a low interest rate if you have a positive credit history. Using a debit card, on the other hand, doesn’t affect your credit history at all.
How Credit Cards Work And How To Use Them Responsibly
A credit card is designed to let you borrow money and pay later. You swipe your card, the bank pays the merchant, and you eventually pay the bank back. Whats in it for the banks, especially if theyre giving away rewards and cash back?
Banks make most of their profit by charging interest on the money you owe them.
But all of this is completely avoidable. Virtually every credit card provides a grace period, meaning you wont be charged interest as long as you pay your full statement balance every month. You must have the discipline to do this, and there are two things you need to do to be successful.
The first thing you must do is stop thinking about a credit card as a way to borrow money. Do not spend money you dont have. While a debit card will prevent you from buying something you cant pay for right now, with a credit card, you must enforce this for yourself.
Treat your credit card like a debit card: Dont spend money you dont have
The second thing you must do is pay on time and in full. To make this easy, you can set up autopay on your credit card, though its also a good practice to review your statement and ensure funds are available a few days before your due date.
If you do these things, you wont pay a penny in interest. You will, however, earn a bucket of money in rewards.
How To Improve Your Credit Score
There are several steps you can take to try to improve your credit score. First, check your credit report to make sure there arent any errors that could be having an adverse effect. Paying your bills on time, every time will have the single biggest impact on your score. After payment history, the next biggest factor in your credit score is the amount of debt you have. Since credit reporting agencies dont have your income information, they use something called credit utilization instead of a debt-to-income ratio.
is the amount of debt you owe relative to the amount of credit you have. So if you have a balance of $3,000 on a card with a $10,000 limit, youre using 30% of your credit. Total credit utilization is based on the aggregate amount across all your lines of credit, both what you owe and how much you have available. Its typically suggested that utilization of 30% or below should be the goal.
What is considered a good credit score can vary among lenders, and you typically arent told what a particular lenders exact cutoff point is between a good credit score and a bad one. However FICO, the most widely known credit scoring model, shares some helpful information you can use as a guide. The most common FICO scores feature a scale of 300 to 850. On that scale, a credit score between 670 and 739 is generally considered good.
You can check out Forbes Advisors list of best cards for good credit to see what might work for your particular circumstances.
Responsible Credit Card Uses
Personal finance experts spend a lot of energy trying to prevent us from using and with good reason. Many of us use credit cards irresponsibly and end up in debt. However, contrary to popular belief, if you can use the plastic responsibly, you’re actually much better off paying with a credit card than with a debit card and keeping cash transactions to a minimum. Let’s examine why your trusty credit card comes out on top, and certain credit card uses and strategies to employ.
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To Protect Your Bank Account
Debit cards are connected directly to your checking account. Whenever you make a purchase whether that purchase is processed as credit or as debit funds are drawn immediately from that account and transferred to the merchant. In that way, it’s like an electronic check.
If a thief gets hold of your card either the physical card, or just your information from it and goes on a spending spree or makes a withdrawal, you lose the cash the person spends. That means money disappearing from your checking account. If you had a set amount in there earmarked for things like utilities, rent, tuition, or something else, you won’t have access to that money. While most banks and debit card processors offer at least basic fraud protection, if not more, you may not get the cash back right away, particularly if a long investigation is required.
With a credit card, however, money in your bank account isn’t touched until you pay your statement. If someone steals your number and makes fraudulent charges, you can flag those charges for the card issuer, and you won’t have to pay them the card will be frozen pending an investigation into the fraud. You don’t have to worry about losing cash and the inconveniences associated with that, like losing the money for your rent.