A credit card used wisely builds a positive credit history. But unfortunately, not everyone uses their credit cards wisely.
In the United States, you must now be 21 years of age to get a credit card in your own name, unless you have a co-signer. If you do get a credit card, be careful. Your goal should be to use the card in a responsible manner. Every transaction, every payment, every missed payment is noted in your credit report.
Here are some ways to use credit wisely:
Shop around for the best interest rate.
Credit cards have different interest rates, so don't take the first one you are offered.
Just like lenders of student loans, credit card companies charge you interest when you temporarily borrow their money. Charging interest allows them to make a profit.
Look for the credit card with the lowest possible fixed rate. (A fixed rate stays the same, whereas a variable interest rate can change each month.)
Be aware that credit card companies can raise your interest rate as long as they notify you at least 45 days in advance. Due to new legislation, the interest rate will not change during the first 12 months that you have the card (although there are exceptions, for example, if you don't make the minimum monthly payment).
Question every purchase.
Before you purchase anything with your credit card, make sure you understand how much it will really cost you.
Ask yourself these questions before using your credit card for any reason:
- Is this something I need?
- Do I need it now, or can I wait?
- Will I be able to pay for it in full when my bill arrives?
- If not, how long will it take me to repay?
- How much will I pay in interest?
- How much will the item ultimately cost me?
- Do I have to give anything up to pay for it?
- Is it worth the price I will finally pay for it?
- All things considered, is using credit worth it?
Do not use all of your available credit.
There may be a cost for going over your credit limit.
If you go over your credit limit, you may pay a hefty penalty, and your credit card issuer is likely to freeze your account. To avoid this, tell your credit card company to not allow any over-the-limit transactions. Thus, any purchase that will take you over your credit limit will be declined at the point of sale.
Even if you use only 50% of your available credit, you may hurt your credit score because the balance on your credit card is factored in as debt.
Pay your balance in full every month.
Or at least pay more than the minimum.
It's best to pay your bill in full every month to avoid paying interest on purchases.
If you find yourself unable to pay your entire balance when it's due, pay the maximum amount you can afford without taking money away from your other living expenses.
You should never charge more than you can afford to pay in full that month. Review your spending habits and cut any unnecessary purchases.
Avoid credit card debt at all costs.
If you find yourself unable to pay your bill, immediately stop charging anything additional on credit cards.
A couple of tips for avoiding debt:
- Send in a payment as soon as you receive your credit card bill.
- Refinance high-rate credit cards (shop around for the best interest rate).
- If you have multiple cards, consolidate them under the card with the lowest interest rate. Once you do this, cancel the other credit cards.
- If you have at least 3–6 months of living expenses put aside for emergencies, consider using this money to pay off credit cards with a high interest rate. Cut up the cards when the balances are zero.
- There is no need to have more than one or two credit cards. Try to limit the amount of credit you carry.
- Keep a list of your credit card account numbers and phone numbers in a secure place. If a card is lost or stolen, report it as soon as you notice it is missing.