Credit cards can be tricky for many to use. They can increase your spending power, offer perks, and help you build credit. But the urge to “charge it now, pay it later” can lead to overspending and debt that’s hard to pay back.
As with most spending habits, managing a credit card responsibly is critical to a balanced financial lifestyle. But with a little forethought and planning, a credit card can be an essential financial tool.
Why Credit Cards Are Important
You may have heard financial experts warn against using credit cards because it’s easy to go overboard. But they offer benefits, too.
- Universally accepted. Credit cards are convenient, secure, and easy to use online and in-store.
- Rewards programs. Some credit card companies include perks with their cards, like cash back, rewards programs for travel and merchandise, and signing bonuses for new cards. If utilized correctly, these programs can give you extra spending power on the things you love or even save you money.
- Fraud prevention. Credit cards can offer an extra layer of security against fraud. For example, card companies may decline a purchase and freeze your card if it detects a charge that seems out of the ordinary or over your usual spending limit, and there are ways to dispute charges that seem fishy.
- Builds credit. Your credit score tells lenders how responsible you’ll likely be with a potential loan. The higher your score, the easier it is to qualify for a loan with a lower interest rate, saving you money in the long term.
Tip 1: Pick a Credit Card That Fits Your Financial Goals
Whether you’re new to managing a credit card or have had one for a long time, it’s best to find one that works best for you. Consider your current financial standing and spending habits, then pick a credit card option that gives you the most back. For example:
- If you’re still building credit, look for a secured credit card with a lower minimum credit limit and no annual fees.
- If you may need to carry a balance, choose a credit card with a lower rate and good balance transfer offers.
- If you want spending power and plan to pay your balance each month, pick a credit card that offers rewards based on your purchases, such as cash back, travel points, or gift cards.
Tip 2: Pay On Time, Every Time
Part of managing your credit card is establishing a good payment history. The more often you pay your credit card bill on time, the more “reliable” you appear to lenders, which can give you an advantage when applying for other loans.
If you skip payments or pay late, you’ll incur interest and late fees. The more you put off paying your bill, the more these fees add up. In the direst situations, the interest and late fees become more than the actual balance, making it difficult to pay the debt off.
Make paying your credit card easier by setting up automatic payments or use online transfers.
Tip 3: Pay Off More Than the Minimum
Ideally, you’ll pay your credit card bill in full every month. Paying off your entire balance keeps you from incurring interest.
But things happen. Sometimes, it’s hard to avoid carrying a credit card balance. If you find yourself in that situation, make sure you’re paying a little more than the minimum payment to cover the cost of the interest and late fees. If you can, make several smaller payments to pay down your balance faster.
Tip 4: Keep Your Utilization Ratio Low
Keeping your utilization ratio low is one way to ensure you can pay off your whole credit card balance. Your utilization ratio is the percentage of the monthly credit line you use. The goal is only to spend what you can repay within a month without overextending yourself. This is usually between 10–40% of the limit for most people, though some months may go higher. If your utilization ratio is low, keeping up with your payments is more manageable, especially if you have to carry over a balance.
Calculating your utilization ratio can help you manage your credit card because it can help you track your spending habits. If you’re regularly maxing out your credit card and carrying a balance, creating a new budget and setting limits for yourself may be called for.
A high utilization ratio can also harm your credit score, even if you regularly pay off your balance. So if you struggle to keep your utilization ratio under 50% or max out your card regularly but consistently make payments, ask your credit card carrier to up your limit or find another credit card.
Tip 5: Read Your Credit Card T’s & C’s
Every credit card is different. When you apply for a credit card, go through the fine print so you understand things like:
- The kinds of fees you might incur and when
- How interest is charged to your account and when
- How the interest rates may change
- How to dispute suspicious charges on your account
Managing your credit card doesn’t have to be rocket science. With careful budgeting and research, you can enjoy extra spending power and rewards programs that work for you! Trailhead Credit Union offers members three credit card options with low APR and zero fees. Check them out here.