When used with planning and forethought, a credit card can become a truly valuable and useful financial tool in your arsenal. But if you get it wrong (which we all do from time to time), you risk hurting yourself financially. From a tainted credit score to nasty interest and fees, a lack of good credit card habits can turn this tool into one that does more harm than good.
To make sure you’re getting the most out of your credit card without experiencing any downsides, keep reading to find out what credit card habits you need to make a part of your daily routine.
1. Timely and early payments
First, one of the most important credit card habits you can improve is paying your credit card bills on time every month. Failure to make a payment can damage your credit score and result in interest payments and late payments.
When it comes to your credit score, your payment history really matters. For example, with FICO credit scores, payment history makes up 35% of your overall credit score and is the most important factor, meaning late payments can hurt your score a lot. However, on the other hand, making regular, timely payments can really help you improve your credit score.
The habit of making early payments also has its benefits. Aaron Bell, wealth consultant at Cannataro Family Capital Partners, explains that if you’re hoping to improve your credit score before applying for a loan product, you should pay your credit card balance down to zero before the end of the discharge period.
“This can help boost the valuation as well as lower the required minimum monthly payments in the eyes of lenders,” says Bell.
2. Redeem the card immediately after a major purchase
If you’re making a major purchase, this is another good time to pay off your credit card balance early instead of waiting for your monthly statement to arrive. Credit utilization (that is, how much of your available credit you are currently using) is 30% of your FICO credit score. Ideally, you want a credit utilization ratio of no more than 30%. If you make a large purchase that pushes you over that 30% by paying it right away, you will help keep your score high.
Bell notes that if you can afford to pay for large purchases right away, this is a strategic way to earn cardholder rewards.
“Some credit cards allow you to use points to pay for certain items, such as flights and hotels,” says Bell. “Paying by card immediately after a major purchase, such as a trip to Hawaii, can help you earn points and stay ahead of your finances so you don’t have to pay high interest.”
If you can’t afford to pay for a large purchase right away, it may be a sign that you shouldn’t charge for it. An equally important habit is knowing when to refrain from using a credit card.
3. Review your application carefully each month
When you receive your monthly credit card statement, it’s important to sit down and review it carefully each month. This is a great time to confirm that you have made all the payments you are paying for and that no fraud has occurred. You can also use this review to reassess your spending habits and budget.
You can also make a plan to pay off your balance if you need to carry it. Your application will tell you how much you owe, when payments are due, what the consequences of late payments will be, and how much you will need to pay in interest and fees. It will also show you how long it will take you to pay off your debt if you only make the minimum monthly payments.
Howard Dworkin, Chartered Accountant and Chairman of Debt.com, is the author of Credit Hell – Getting Out of Debt. Dworkin shares a look at checking credit card statements.
“Do you check your gas gauge before you ride? Do you look at the expiration date before drinking milk in the refrigerator? Of course yes. It will only take a moment. It’s the same with checking credit card statements,” Dvorkin explains.
Despite how easy it is to make this brief overview, Dworkin notes that many people overlook this important habit, which can prevent them from catching a scam or noticing how much they are spending in certain categories.
4. Set Limits on Automatic Credit Growth
For any existing credit cards or future credit cards you apply for, take stock of your current credit limit and set a limit on how much your credit card issuers can automatically increase your credit limit without warning you.
Some credit card issuers automatically increase your credit limit without asking you if you’ve had the card for a while and consistently make payments on time. If you’re struggling with the temptation to spend money, a large credit limit can do more harm than good.
“Setting an auto-grow credit limit can help you be responsible and aware of the amount you are spending each month, and in turn, is a great way to make sure you can pay off your card every month,” says Bell.
5. Know what potential commissions you will face
To avoid credit card issues, awareness is key. Especially when it comes to potential fees you may have to pay.
The following fees are the ones you should be aware of for every credit card you have.
- Annual feeA: Withdrawing a card without an annual fee is the best way to avoid recurring charges. While cards that charge a fee usually have great perks, you need to decide if those perks outweigh the cost of the annual fee.
- Balance Transfer FeeA: If you want to transfer a debt to a balance transfer card, your credit card issuer may charge you a fee as a percentage of the transfer amount. Typically, the balance transfer fee is between $5 and $10, or 3% to 5% of the transfer amount.
- Cash withdrawal feeA: Some credit cards allow you to withdraw cash, but they usually charge a fee as a percentage of the amount you borrowed.
- Foreign transaction feeA: If you want to make a purchase with a credit card while traveling internationally, please confirm that your credit card charges an international transaction fee (usually 3% of the purchase amount) each time you make a purchase. If you travel the world a lot, having a credit card with no foreign transaction fees can save you a lot of money.
- The late payment feeA: One very good reason to get in the habit of paying your credit card bills on time every month is to avoid late fees. By law, these fees cannot exceed $40, but they can indeed increase if you repeatedly miss payments.
6. Residual interest plan
Residual interest (also known as trailing interest) is a particularly hidden form of interest that many credit card users are unaware of. If you have a credit card balance, residual interest will accrue between the time the credit card issuer sends you a statement and the time they receive your payment.
To avoid residual interest, it is best to repay the card in full every month. If you currently have a balance but can pay it off, don’t wait for this application to arrive in the mail. Check your balance and pay it online. Your credit card issuer will include any real-time information about your balance and any accrued interest to your online account. You can also call your credit card issuer and ask not only for your current balance, but also for your payout balance. So you can make a payment that will cover your balance and any residual interest. If you can afford it, overpay to make sure that all residual interest is paid by the time the issuer receives your payment. Your credit card issuer will refund any overpaid amount to you.
Again, the best way to avoid a residual interest rate is to never have a balance sheet. Chaim Geller, financial advisor and personal finance expert at Help Me Build Credit, advises others to stop using any credit cards that have a balance.
“I strongly recommend that people who have a credit card balance stop using that card immediately and for future purchases… use a different card that you pay in full every month,” Geller says. “The reason is that on a card that you have a balance on, you will end up paying much more interest due to the fact that the card does not have a grace period and interest starts accumulating from the day of purchase.”
Once you know the best practices for using credit cards, you can begin to form healthy credit card habits that will allow you to get the most out of your cards without running into pesky fees or interest.
Paying off your credit card in full every month, keeping a close eye on your reports, and having a plan to avoid fees and interest will help you reap the benefits of using a credit card while avoiding its drawbacks.
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