Credit cards can be useful and convenient. But if you aren’t careful about how you use them, you can put yourself on a path to serious financial trouble. You could build up debt that might take you years to pay off or damage your credit rating. Here are some smart tips for taming the credit card monster to be a useful asset.
Before applying for a credit card
1. Know what you’re getting into
When you sign up for a credit card, you are entering into a legally binding contract, so it’s important that you understand the terms and conditions.
Credit card applications must have an “information box” that outlines key features of the credit card like interest rates and fees. But don’t stop reading there. Review the complete terms and conditions so you’re aware of other important details, such as:
- your liability in case your card is lost or stolen
- who is liable if you share the card with a “joint borrower” or “secondary user”
- any restrictions and limitations on reward programs and benefits
- how to cancel the card
2. Know yourself and your spending habits
Before you start shopping around for a credit card, think about how you will use it and set some guidelines for yourself. A credit card doesn’t increase the amount of money you have available to spend. Continue to live within your means and your budget.
3. Limit the number of credit cards you apply for
Every time you apply for a credit card, it’s recorded by the credit reporting agencies. Applying for too much credit can damage your credit rating by creating the impression that you may be relying too heavily on credit.
When you have a credit card
1. Avoid impulse buys
Don’t take purchase decisions in a haste, specially if you don’t have the money available in your bank account to pay for the item. Ask yourself if you really need to make that purchase right away (or at all), or if it can wait until you have the money to pay for it.
2. Aim to pay off your balance in full by the due date every month
Carrying a balance means that everything you charge to your credit card actually costs you more than the purchase price, because you are paying interest.
3. If you have to carry a balance, try to make payments as soon as you can
Pay off the balance as soon as possible to reduce your costs, because interest is charged daily. And always try to pay more than the minimum amount owing.
4. Make regular payments to help build a good credit history
Paying the balance in full every month will show other lenders that you are a responsible borrower. On the other hand, if you make payments late or miss them entirely, you hurt your credit score.
5. If you can’t control, stop it
If your monthly balance is growing, stop using your credit card until you get your finances under control. Use cash instead of a credit card. Look at your budget for ways to trim your spending.
6. Avoid taking cash advances on your credit card
You are charged interest from the day you take the advance until the day you repay the entire amount, and unlike regular credit card purchases, there is no grace period on cash advances from a credit card.
If you don’t have enough money in your account, look at your budget to see where you can trim your spending.
7. Check your bank statements
Every month, carefully check your credit card statement to make sure that there are no errors. It’s a good idea to keep receipts for all of your credit card purchases so that you can verify the amounts against your statement. If you find an error, report it to your credit card issuer right away.
8. Don’t buy for points
If your credit card has a rewards program, avoid increasing your spending or buying things you don’t need just to get points.
9. If in need, go for cheaper options
If unexpected expenses come up, talk to your financial institution about your options. There may be alternatives to using your credit card that will cost less in interest, such as a line of credit or short term loans.
10. Keep your card, your PIN, and your security code secure
If you share your PIN or security code, you risk being held financially responsible for unauthorized transactions.
11. The positives
If you are financially disciplined and organised, credit cards can be used as a positive tool. You can make most purchases with credit cards, but make sure you pay it fully at the end of the month. This way you have the following benefits:
- You earn the reward points which comes with the credit card. Often this can accumulate to a good amount in few months and can come as welcome surprise.
- You just have to carry minimum cash in your wallet. No need to run around ATMs or keep looking for change.
- You can have an estimate of your monthly expenses by looking at your credit card statement. This can be helpful with your budget.
Having said these, financial discipline is the keyword here, that can make or break your fortune.