Managing your credit cards can undoubtedly be a critical tool if you are trying to build your credit.
For most people, credit cards are practically indispensable. It is how we fund most of our purchases, ranging from groceries to household items.
However, the qualities that make credit cards so useful and convenient can result in financial trouble.
Without adequate caution, credit cards can encourage financial indiscipline, which of course, leads to the risk of accumulating debt.
Similarly, not managing your credit cards properly can have an adverse effect on your credit score. This, in turn, affects your access to affordable credit.
Clearly, proper management is critical to fully derive the benefits of credit cards and minimize their risks.
Thus, in this article, we will take you through some of the top strategies for optimally handling your credit cards. Let’s get right into it:
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Pay your bills on time
It is important to pay your bills on time with your credit cards. By bills, we mean all the bills you are responsible for, and not just your credit card bills.
Paying these bills when due is a great way to improve your perceived creditworthiness.
On the other hand, however, late payments can initiate a slippery slope to a financial crisis for you.
Typically, a single late payment can get reported to the national credit reporting agencies. This would, of course, make a dent in your credit score, further narrowing your access to credit in the future.
Late payments do not only affect your credit score, though. They can also get very expensive. A late payment could result in your card issuer imposing late fees and even higher interest rates.
In essence, you would be spending a lot more money than necessary. Thankfully, you can avoid all of this by making payments promptly.
To prevent any oversight on your part, you should set up alerts for bills or even automate payments from your account.
Pay more than the minimum payment
The minimum payment is the lowest amount you can pay on your account every month to avoid any penalties from your card issuer.
It is usually calculated as a percentage of your credit balance. By making the specified minimum payment on your card every month, you should be able to avoid late fees and interest penalties. Similarly, this would help build a good repayment history for you.
The problem is that while you can make your minimum payment and avoid the consequences of late payments, it is not necessarily the cost-effective option.
You see, over time, making just the minimum payment would result in you incurring a lot of interest costs.
This is called the minimum payment trap. It simply means you’ll be making repayments for the maximum possible time since most of your payments go into covering interest costs than the original debt.
To avoid this, try to pay significantly more than your minimum amount every month. This way, you will reduce the long-term cost of using your credit cards while paying off your debt much faster.
Keep your credit utilization ratio low
As discussed earlier, credit cards aren’t just a tool to conveniently make purchases. They can also be very instrumental in improving your credit score. However, if this is going to be the case, you will have to pay enough attention to your credit utilization ratio.
If you aren’t familiar with the term, credit utilization ratio refers to the percentage of your credit limit that you make use of. For instance, if your credit limit is a total of $1,000 and you make use of $100 in a particular period, you have a credit utilization of 10%. You can check out credit card utilization explained to understand the concept better.
Credit utilization is one of the significant factors considered in the computation of your credit score. A good rule of thumb is to keep your credit utilization under 30%. While this is generally considered ideal, it might be best to aim for an even lower credit utilization (such as 10%).
There are various strategies you can adopt to keep your credit utilization rate low. For instance, you can pay off your purchases on the same day.
Similarly, you should make multiple payments within the same billing cycle. Lastly, asking for a credit limit increase could also bring your credit utilization rate down.
Monitor your statement
This is something most credit users don’t do.
Just like your original agreement with the card issuer, it is crucial that you thoroughly go through your credit card statement to avoid problems. For instance, checking your statement is a great way to check for fraudulent and suspicious transactions on your account.
While most issuers have great fraud-detection systems in place, it is still essential that you can check your statement every month just in case. In addition to avoiding fraud, checking your statement helps you keep to your budget.
In essence, you are able to see what transactions you are making, the level of your expenses, and whether you are maintaining a low balance. This way, you can take action when necessary to optimize your credit card use.
While all of the above strategies are great, they are really only effective if you keep your spending under control. It is generally ideal to view your credit card purchases as a loan to yourself that must be paid back quickly.
Furthermore, never use your credit card to make a purchase that your bank account cannot cover. This would only lead to you carrying over balances, paying higher interest rates, and possibly drowning in debt.
You can create a monthly budget to map out your expenses for the month. This would help you keep your spending under control.
Credit cards are certainly one of the most important modern financial tools.
However, a lack of understanding about how they work can become very problematic. Thus, it is essential to get informed about the various ways your credit card habits can affect your finances and adopt the best practices for managing them.
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Last Updated on 12th November 2022 by Emma