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Credit Cards 101: Healthy and Responsible Credit Card Use

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In previous Credit Cards 101 courses, we learned that credit cards and credit card companies are not evil. Credit cards are simply a financial tool that gives us access to credit as well as convenience. However, some people struggle to use their credit cards in a way that is healthy and responsible. So, what is the right way to use your credit card? Here are 13 ideas to getting a good start on using your credit cards correctly.

  1. When using a credit card, remember that it is the same as taking out a loan. Credit cards are not the same as cash and you should certainly not think of credit cards as free access to money. As with any loan, you will pay interest on the amount you have borrowed, every month that you carry a balance.

  2. Any charges you make with your credit card should fit within your monthly budget. Would you take out a loan for a new car or for a mortgage on a home without first determining if the loan would fit within your budget? Anytime you take out a loan with your credit card, you should also ensure that paying off your credit card charges will fit within your budget.

  3. You should never carry a balance on your credit cards from month-to-month. You may use your credit card for convenience, online shopping, traveling or to build your credit history. These are all great ways to use your credit card. The key is to have that money sitting in the bank, just waiting to pay off the bill as soon as it comes in. If you pay off your credit card each month, you will avoid being charged high interest rates. Essentially, you are using the bank’s money for free.

  4. Use your card regularly for small purchases and then pay the balance on time. Using your credit card is necessary to keep the account open, and paying the bill in full and on time will have a positive effect on your credit history. 35% of your credit score is based upon your on time payment history.

  5. Don’t use more than 30% of your available balance on your credit card. 30% of your credit score is based upon your credit utilization ratio. In plain English, this means that the less you use of the amount of credit available to you, the better. Low credit use means a lower credit utilization ratio and a higher credit score.

  6. Don’t close credit card accounts after you have paid them off. Remember your credit utilization ratio? When you close an account, you reduce the amount of credit that you have available. If you are carrying high balances on other credit cards, closing an account will make your credit utilization ratio go up and your credit score will go down.

  7. Use your credit card for larger purchases (if you can immediately pay off the debt). Use your cash or debit card for smaller, every day purchases. Credit cards offer consumers protection against fraud and quality issues. Not happy with that $2,500 car repair? If you paid cash, good luck getting the issue resolved. If you paid with a credit card, you only have to dispute the transaction to your credit card company and they will withhold payment on the repair until the issue is resolved.

  8. If you are a responsible credit card user, go for the reward points or the cash back. If you use your credit cards regularly and always pay off the balance each month, you should get a credit card that offers reward points or cash back. What could be better than getting points to buy plane tickets or 2% cash back….for free? On the other hand, if you don’t pay your bill when it is due, you may lose those points, you won’t get cash back, and you will start paying double digit interest rates and late fees. Suddenly, you understand why your parents always said that nothing is free

  9. Read your credit card statement every month. The only way you will be able to catch errors in your statement or find fraudulently charged expenses is to read your bill. If you find something wrong, report it to your credit card company immediately. Just call the number on your bill or on the back of your credit card.

  10. Use your credit card while shopping online. Identity theft originating with online purchases is not uncommon. Using a credit card means that, while the situation is being resolved, you are not out any of your own money. If you had used a debit card, it’s your money that is being held hostage while the situation is being resolved. You might be out that cash for two weeks before you get it back. A good rule of thumb is to never use your credit card on a web page that does not begin with https: (that s means secure).

  11. Be careful with same as cash offers or 0% offers. You will need to ensure that you pay the transaction off before the final payment is due. If you don’t, you will be charged the interest retroactive to the date of purchase. For example, if you borrow $500 at 12 months same-as-cash, divide the $500 by 11 and pay the resulting $45.45 every month and you won’t carry a balance into the 12th month. You will completely avoid interest charges along the way.

  12. Watch out for user fees or annual fees. Some credit card companies are charging a fee to users who pay their cards off in full each month. There are a few credit card companies charging annual fees upwards of $400.00 to make sure they make some “profit” off of you each year.

  13. Pay attention to the little small print booklets you receive in the mail. This is your credit card company notifying you of changes to your account. They may be telling you about interest increases, changes in default terms, etc. (they must notify you in writing per federal law). If you’re not sure what is changing, call them and ask. If you don’t like the change, tell them you don’t like it and ask what options you have. If you choose to close your account (and that is always an option you have) before an interest rate change goes into effect, they can’t raise your interest rate and you will be at your current rate as long as you pay them their monthly payment on time. Miss a payment or be late and they will immediately use the default rate based on the terms of your contract with them.

Misuse your credit card and you will quickly find yourself in a mess of debt, fees, and high interest rates. Using your credit cards in a healthy and responsible manner will lead to convenience, flexibility, and a great credit history. Start a habit of good credit card use and you will have a future with sound personal finances.




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