How can you use a credit card responsibly?
If you are getting a credit card for the first time, I can imagine how excited you will feel. That plastic card you are holding is more than just a plastic. It can determine a lot about your finance depending on how you make use of it. Possibly you are already used to debit cards which offer you certain level of convenience over cash. Credit cards offer other benefits which your debit cards don’t offer. However, credit cards demand that you use it responsibly. If you use your credit card responsibly, you will enjoy the benefits that the card offers.
Apart from the fact that credit card is a convenient means of payment, the other benefits you can enjoy include the ability to start building your credit. You can’t achieve this with your debit card. You can make large purchase with your credit card. This may not be possible by using a debit card. In most cases, restriction is placed on the amount you can spend with your debit card within twenty four hours. This is called charging limit. In fact, credit cards can serve as your life line during emergency which may require that you make instant payment even though you don’t have money in your bank account. With credit card, you can request a chargeback if you buy something you seem not to like. Above all, you can even earn bonus or reward points when you use your credit card to make purchase.
On the other hand, if you use your credit card otherwise, you may need to face the music. It may not only lead you into debt, it can damage your credit. Therefore, one good thing you can do to yourself is to learn how you can use a credit card responsibly. So, how do you use a credit card responsibly? That is the tips I like to share with you in this article.
- Apply for the right card: You need to understand that credit cards are not the same. There are different types of credit cards in the market. Each of them has its unique features and they are designed specifically to meet the needs of certain class of consumers. For instance, there are travel reward cards. These cards have the frequent travellers as their target customers. Travel reward cards allows the cardholders to earn travel reward points any time they use the credit card to buy air tickets and pay for hotel accommodation. For people that travel regularly, the benefits can be enormous. But for people that travel just once in a year, travel reward cards may be very expensive to hold as the cardholders may need to pay annual fee on the card. Therefore, if you want to use a credit card responsibly, it makes sense that you only apply for the card that suit your lifestyle and spending habits. Other types of credit cards that are available are reward credit cards, low interest credit cards, secured credit cards and balance transfer credit cards among others. Before you sign up for any credit card, you should ensure that you read and understand the fine print.
- Keep your credit utilization low: When you apply for a credit card, the credit card company will place a limit to how much you can spend with the card within a month or the maximum amount of balance you can carry in the card per time. This is referred to as credit limit. The higher the credit limit, the more purchases you can make with the card. However, the fact that the credit card company grants you a particular credit limit does not mean you should exhaust it. If you actually want to use your credit card responsibly, you should only spend a fractional part of your credit limit. Some people think that they can use up the credit limit and pay back at the end of the month. They think that as long as they pay back the card balance, they are using their credit card responsibly. This is just the opposite. Exhausting your credit limit will hurt your credit as it will keep your credit utilization ratio very high. What is credit utilization and how is it calculated? Credit utilization ratio is the amount you have as your card balance expressed as a percentage of your credit limit. It is calculated by dividing your card balance by your credit limit. For example, if your card balance is $600 while your credit limit is $1,000, your credit utilization ratio is 60%. The lower your credit utilization ratio, the better the effect on your credit score.How much of your credit limit should you spend? If you want to maintain healthy credit utilization, it is expected that your spending or card balance should not exceed 30% of your credit limit at any given time. How can you keep your credit utilization low? You can achieve this by ensuring that you don’t make large purchase with your card. Don’t charge all your expenses to your credit card. You can use your debit card to make some payments while you pay your utility bills with the credit card. If you discover in any month that you have charged too much against your credit card, you can quickly make payment before the end of the month. It is your card balance at the end of the month that your credit card company reports to the credit bureaus. Therefore, you don’t need to wait till the end of the month before you make payment on your card. But in order to ensure that you are using your credit card to build your credit, you should try to have a balance on the credit at the month end and then pay off the whole card balance. If there is no balance in your card at the end of the month, there may not be anything to report to the credit bureaus. Therefore, there will not be any indication on how you pay your card balance
- Make full payment: There is no crime if you carry balance in your credit card but it is better that you pay off your card balance completely at the end of each month. If you carry balance over, you will need to pay interest on the card balance. Depending on the amount of the card balance, it can affect your credit score as the amount will lower the credit you have available for use. Credit card companies may encourage you to just make minimum payment. That is, they will ask you to just pay a certain percentage of your card balance while you carry the remaining amount forward. This may not help you. What this means is that you are just servicing the interest on the card balance while you barely pay off just a little amount from the main principal. This can keep you perpetually in debt while the credit card company keeps earning interest income from you.
- Don’t make late payment: It is not enough to pay your card balance; you should ensure that you make the payment on time. Don’t make late payment as this can attract penalty. You may be asked to pay late penalty fee. Your apr may even be reviewed upward. Besides, making late payments can give bad impression about you that you are either not organized or that you are having difficulty in managing your finance.
Read Also: 3 Ways to Pay Credit Card Balance
- Don’t default in payment: You should do everything you can in order to ensure that you are not in default. Instead of allowing your payment to enter default, it better to make minimum payment on your card balance. Default can stay up to six years on your credit report. This is a bad signal to lenders and creditors.
- Don’t close your card with balance: It is not good to close your card. At times it may be better to keep it active. However, if you have any strong reason for closing the credit card, you should ensure that you pay off the card balance before you do so. But it is important that you know the implication of closing your credit card. You may ask, “What are the effects of having your credit card closed?” Two things will happen. It may shorten your credit history. Second, it will reduce your available credit limit. If you are closing your credit card, you should tell your card issuer to notify the credit bureaus that the closure is at your own instance and not the opposite.
- Keep your credit card safe: Even though credit cards seem to be safer and more convenient than making payments with cash, it comes with some risks. The card can be lost or stolen and this can lead to identity theft. That is why you need to keep your credit card safe at all times. Ensure that you only use the card to make payments on secured websites. In case you card is lost or stolen, you should quickly contact your card issuer. You can get the contact details of your credit card issuer at the back of your credit card. Because the card will no longer be with you when the card is lost or stolen, you may need to write down the contact details somewhere else that is easily accessible to you. Alternatively, you can visit the website of the credit card company.
Read Also: Why You Should Not Max out your Credit Card.
- Review your statement: The details of the transactions that you made with your credit card will be contained in the statement that will be sent to you at the end of each month. Don’t just look at the card balance. Try to go through the details to see if all the transactions were actually made by you. If there is any transaction that is not clear to you, you should endeavour to investigate. It might be a sign that your identity has been compromised. If it is a case of identity theft, you need to let your card issuer know about this. They will advise you on what to do.
You can agree with me that it is not actually that difficult to use a credit card responsibly. Those little points mentioned above can make a lot of difference in your credit rating.