Credit cards are powerful tools, and like any tool they can help you if used correctly, and hurt you if used wrongly. Used wisely, credit cards can earn you rewards like cash back, bonuses, and airline miles. But if you don’t pay attention to the terms and services, and you make the wrong choices, you could end up with a pile of debt, and snowed in by usurous interest rates.
Here are some great credit card tips that, if followed, will ensure you never get in over your head:
Protect Your Credit Score
1. Pay off your entire balance every month. That’s the only way you can avoid pay interest charges every month. If you start accumulating a rolling balance, it can quickly spiral out of control, until you find yourself in a situation where all you can do is pay off the interest each month, and the principal does not decrease at all. That’s a terrible situation to be in, and it’s all too common. In fact the Federal Reserve estimates that 40% of American households carry credit card debt. So exercise some discipline and pay off the entire balance each month.
2. Pay on time. Making late payments can get you in trouble in other ways as well. For one thing, there is typically a late fee of $30 or more, and secondly your interest rate can go up. When you make late payments it affects your credit score, and your interest rate can be jacked up dramatically, to crazy rates approaching 30%. So make your payments on time every month!
3. Not too many cards. Limit the number of credit cards you own to between two and six. Applying for many credit cards will hurt your credit score. Closing several cards at once will also hurt your credit score, strangely enough. For the best possible credit rating, keep about two or three credit cards, and pay them off each month.
4. Know the terms and conditions. Read the fine print. Know what your interest rate is, under what conditions it goes up, on what date your bill is due each month, and what the grace period is if you’re late.
5. If you’re credit is great, negotiate. If you have an excellent credit score – 700 or above – you may be able to get a lower interest rate. And if you do make a payment late, the company might be willing to drop the late fee if it’s an isolated incident.
6. Don’t max out your card. Credit bureaus look at what percentage of your available credit you are using. If it’s too high, your score drops. So don’t go over 30% of your available credit.
Not All Credit Cards are Created Equal
7. Know the terms on balance transfers. If you’re doing a balance transfer from an old card to a new one, ask if there is a transfer charge and how much it is. Some cards have no balance transfer fee, while others charge 1% or even 2%. This can really add up if you’re transferring a large balance. Also, if it’s a zero interest or low interest transfer deal, make sure you understand what rate applies to new purchases. If it’s a zero percent transfer, that almost certainly applies only to the transfer, not to new purchases. Make sure the interest rate on new purchases is not excessively high.
8. Be careful with rewards cards. Rewards cards offer tempting incentives like airline miles, cash back, and prizes. Whoo hoo! Actually, not so much… Most rewards cards carry a higher interest rate, and often have complicated or unrealistic conditions for getting the rewards. It’s often best to stay way from these.
9. Store cards. Credit cards issued by retailers often carry a higher interest rate. Be careful with these. They can qualify you for store discounts, but opening too many of them will also lower your credit score.
“Convenience” Can Cost
10. Contactless cards are vulnerable. New “contactless” cards allow you to simply wave your credit card at a reader. You don’t have to hand it to the cashier or even swipe it through a machine. But thieves can sometimes scan or intercept your card data. And if thieves get a hold your card, they can rack up large charges with the same ease that you can. Until better security procedures are instituted with these cards, it might be best to avoid them.
11. “Convenience checks” are dangerous. You know those convenience checks that credit card companies send you in the mail along with your statement? Don’t use them. They carry an extra fee of 3% or 4%, higher interest rates, and no grace period on the payment date. They also don’t give you the same consumer protection that your credit card does. They are simply a bad idea. Trash them, but make sure to tear or shred them, as you should do with all sensitive mail.
12. Credit card protection insurance is limited. This insurance, offered by credit card companies for an extra monthly fee, actually only covers the minimum monthly payment, and only if you are disabled or unemployed. Meanwhile interest will continue to build on your unpaid principal. So this insurance is not really worth the extra fee that you pay. The only way I’d recommend it is if you carry a large balance, and stand a good chance of losing your job.
If you’re credit rating has been damaged, opening a new credit card account (assuming you can qualify) can be one way of re-establishing your credit worthiness. But watch out for these risks:
13. High interest rates. Cards issued to those with bad credit histories always carry higher interest rates, sometimes in the 18% to 22% range. The credit limit is usually low, often not more than $300 or $500. On top of that, there are often extra fees, such as an annual fee. Read the fine print. In the end, this is still a good way to re-establish your credit worthiness, but only if you’re sure you will pay off the balance every month.
14. Restrain yourself. If you’ve signed up for a low-limit, high interest card in order to re-establish your credit rating, companies may begin bombarding you with offers for more of the same types of cards. Don’t go for it. You could end up over your head, with a revolving balance that you can’t pay off, paying huge interest rates and plunging into debt. Stick to one low-limit, high interest card in order to rebuild your credit, and pay it off each month.