How to use a Credit Card
While most of us know how to use a credit card, a little reminder never hurts. Credit cards can be an easy way to earn points, miles, cash back, etc. and it seems like issuers are coming out with exciting new offers all the time. However, these rewards come with some major pitfalls and even a small slipup can negate all of the benefits you were meant to receive. Here are a couple tips on how to navigate the world of credit cards.
Never Carry a Balance
Over 50% of Americans carry a balance on their credit card for over a month in any given year. Credit cards are one of the most expensive ways to borrow money with rates approaching 30%, especially on cards with good rewards. If you are carrying a balance, the rewards are pretty much never worth it. Only consider a rewards program once you have paid off all of you credit card debt and plan on never carrying a balance going forward.
Understand your FICO Score
Most lenders use your FICO score to determine your creditworthiness. Your FICO score is comprised approximately of 35% payment history, 30% amounts owed, 15% length of credit history, 10% new credit and 10% types of credit used. Your score isn’t static; it evolves with your finances, and you can improve (or damage) it depending on your degree of fiscal responsibility. Missing a payment and using the majority of the credit available to you are the biggest factors that can negatively impact your credit and can stay on your report for 7 years.
Know the Rules
Each issuer and specific card comes with its own set of rules. If you want to maximize your benefits, understanding how your card works is vital. Some cards give more points on certain items while others can carry large annual fees. Don’t be surprised and make sure you to do your homework before selecting a card. While the legal documents that come with a credit card might not be fun to read, it is always worth understanding what you are agreeing to and it can also give insights to what rewards you are getting as well.
Choosing a Card
Once you have all of your credit card debt paid and you understand your FICO score and how important it is to know the rules, then it comes down to picking the card itself. The good news is that there are several websites out there that help break down the pros/cons of each card. Some of my favorite are NerdWallet, The Points Guy, and US News. Here are a few tips to keep in mind. Sign up bonuses are nice but never extend yourself to get them. Choose a starting bonus that already fits your spending pattern and know that you can pay it off even if something unexpected comes up. Cards with annual fees have better rewards but can often not be worth it if you are not maximizing your benefits. Plenty of cards with low and no annual fees have great rewards. Cards with 0% introductory rates are mostly just a trap to get you used to carrying a balance and must be very carefully used.
Credit cards are full of rewards but also plenty of potential danger. The reason issuers are able to offer so many rewards is the fact that so many people are using the cards inappropriately. Make sure you are not on the wrong side of the equation.