How Credit Cards Affect Your Overall Financial Picture

Credit CardsCredit cards, when used correctly, an be a valuable asset to your overall financial picture.  They can improve your credit score, leading to even higher credit limits and better interest rates, and you may earn cash back, air miles, hotel discounts, and other rewards.  However, failing to use them wisely can result in a much lower credit score, higher interest rates, and fewer options when you really need credit.  So, what are the best ways to use credit cards to your advantage?

Carry Fewer Credit Cards

Although it can be really tempting to apply for, and even carry, lots of credit cards, you really don’t need more than a couple of good credit cards.  And by good credit cards, we mean credit cards that carry the lowest interest rates, have reward options that you will actually benefit from, and that have no annual fees.  Of course, if you’re working to improve a damaged credit score, or if you have no credit, then you’ll have to start with a subprime card.  With subprime, it’s imperative that you review the terms!  Make sure you choose a starter card with the lowest interest rate and watch out for hidden fees!

Don’t Spend Carelessly

One of the biggest mistakes that people make with credit cards is spending recklessly.  We see something we think we just have to have, but then we don’t have the cash, so we use the credit card.  And that’s fine if you can pay the balance off when the bill comes.  But, nine times out of ten, we can’t, and that just makes you a little more short of cash until you get the new bill you’ve just created paid off.  If you’re not careful, you’ll end up having to use those credit cards to make ends meet when you’re over your budget because you’ve got several credit cards you’re paying on. A good rule of thumb I once heard regarding credit cards is this:  Buy it once, pay for it twice.

Of course, that doesn’t mean you should never use your credit card.  Keeping them “just for emergencies” or never using them doesn’t really help your payment history – just make sure you occasionally buy something, then pay it off when the bill comes in.  That is the best approach, by far.

Review Every Transaction

Pay attention to what you spend, where you spend it, and make sure you were actually the one who used your credit card!  If you’re close to your limit, log in to your account online and make sure you don’t go over your limit.  No one wants to pay those overlimit fees, trust me!

Pay Your Card Off Monthly

Pay your credit card bills off every month!  Save yourself the interest charges and keep your credit score on track!

Use Those Rewards

Personally, I like the cash back rewards.  I ALWAYS credit them to my account, although there are those who “save” them up all year and then have the credit card company send them a check.  And I have a friend whose husband uses his card to fly for work, and then they use the air miles for vacations.  Whatever works best for you – just don’t let those rewards go to waste!

Closing or Opening Accounts

Assuming you’re using your credit cards wisely and then paying them off each month, you probably won’t want to close the card out.  But, if you do decide to get a different credit card that better fits your lifestyle, or you close an account, be sure that you do so carefully.  Too many changes too fast can cause your credit score to drop more than just a few points.  It’s better to wait three, six, or even twelve month between opening or closing accounts so that your credit score has a chance to level out before the next change comes along.

Remember, credit cards are great financial tools, but if not used wisely, it’s really easy to get in way over your head!  And then, it can take years to pay off bills that you could have avoided creating just by thinking before you slid your card through the machine!

Irresponsible Credit Card Habits

Whether your credit is extremely good or extremely bad or somewhere in between, it’s really easy to fall into the habit of using your credit cards irresponsibly… whether it’s that shopping spree you just couldn’t resist or that cash crunch you’re trying to avoid, irresponsible use of your credit cards can really get out of control if you’re not careful.  And those bills can be difficult, if not nearly impossible to pay off, and it really hurt your credit score in the long run.  So, it pays to be smart when it comes to credit and credit cards.

Here are a few smart rules to stick to when it comes to using your credit cards:

  • Plan ahead when you’re going to use a credit card.  What will you use the card for?  How much will you allow yourself to charge?  And, more importantly, what time frame will it take to pay the balance off?  Purchases made with a credit card should be carefully considered… Are you buying a new television?  New tires?  A new fall wardrobe?  If you’re using the card to buy something that’s on sale, will the interest charged against the purchase ultimately cost more than if you’d waited and purchased the item with cash instead, even if you have to pay full price?
  • Unless you’re using your credit card to earn rewards and paying the card off every month, don’t use your credit card for everyday purchases like food, gasoline, utility bills, or entertainment.  Not only will you be paying on the card long after you’ve used up the consumable goods, but you’ll be paying interest, too!  See if you can’t cut a few corners elsewhere in your budget so you aren’t forced to use a credit card for everyday purchases.
  • Avoid cash advances unless you have no other option!  Cash advances usually come with a transaction fee (2-4% of the advance or a flat fee, depending on the card) and have a much higher interest rate than regular credit card purchases.  That means you’ll have extra charges that will take a lot longer to pay off.
  • Always try to pay more than the minimum payment due on the credit card.  Remember, every dollar that you can pay off saves you money!  Interest charges over the life of a credit card balance can be astronomical.  Have you ever paid attention to the section on your statement that shows how long it will take to pay off the balance if you only make the minimum payment?  And how much the interest will amount to?  Wow!  It normally take YEARS to pay off even a few hundred dollars.  Do yourself a favor and pay as much as you can every month and get that bill paid off!
  • And, speaking of payments, always allow plenty of time for your payment to clear… One of the biggest mistakes you can make is waiting until the last minute to pay your bill, only to discover that the site is “down for maintenance” or that it can take up to three days for your payment to post and your payment is due now.  Waiting until the last minute is a risk you can’t afford to take – just one late payment showing up on your credit report can cost you lots of points on your credit score and you may even find your interest rates rising on other credit cards and loans… all because you waited too long to make your payment!

Remember, the goal with credit is to have it available, but don’t misuse it!  Credit reporting is much more sophisticated these days… they don’t just look at whether or not you have credit and pay your bills!  There are lots of factors that are taken into consideration, including evidence of responsible usage.  Make sure you use your credit wisely!