5 Responsible ways to use credit card

Most of us have at least one in our wallet.  Or two.  Some even five!  A credit card can be our worst enemy or a useful tool.  Let me share some scary credit card statistics according to research by Value Penguin:

  • Average American Household Debt: $5,700

  • 41.2% of all American households carry some sort of credit card debt

  • Households with the lowest net worth (zero or negative) hold an average of $10,308 in credit card debt.

My desire is that you don’t become one of these statistics.  When used well, credit cards can provide useful value such as:

  • Assist in improving our credit score

  • Record all our transactions making it easy to monitor our finances

  • Earn rewards or cash back that can be put towards future purchases

In this post I want to share five simple recommendations that will ensure you use your credit cards wisely.

 
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1 ) Never Carry a Credit Card Balance

The first and most important rule is to never carry a balance. Pay off your balance full every month. Carrying a balance means paying compound interest often at rate of 15.0% or more. The $500 flat screen television black Friday special could end up being a $1,000 if you were to only pay the minimum. Also buying more than you can afford oftentimes lead to a downward spiral of additional debt - you want to avoid this death spiral at all cost!

2) Always Pay on Time

Never be late with your credit card payment. Not only will you waste money on fees ($25-$35) and penalty interest rate on your balance, you’ll also damage your credit report. Friends don’t let friends miss their credit card payment. Even if we can’t afford to pay the balance in full, at least pay the minimum payment.

The easiest way to avoid this ridiculous error is to set up automatic payment. All credit card companies allow you to do this on their website and you never have to worry about forgetting a due date. If for some reason you accidentally missed a payment, give the credit card company a call. They are usually lenient with first timers and you can get your fee waived as well as damaging your credit report.

3) Never Use Credit Card Cash Advances

Credit card companies will come up with all sorts of tricks to get you to use their credit cards. One of them is Cash Advances - using a credit card like an ATM to get you some cash. This ranks up there as one of the biggest card offenses. Cash advances aren’t subject to same terms as traditional card use and comes with a very expensive price tag:

  • Super high interest rates (25% vs. 15% on regular credit card use)

  • One time transaction fees (i.e. $5-$10 or a percentage of amount you withdraw)

  • Interest rate starts accruing the moment you get cash

4) Evaluate Rewards Carefully

To be transparent, I am a big fan of credit card rewards. By responsibly using travel reward credit cards I was able to take my family to places like Hawaii for a fraction of the cost. However, I’ve also seen people who’ve gotten carried away with all these rewards. Whatever “free stuff” you are offered, they are not a good deal if you carry a balance. Also most of these cards have annual fees and if not evaluated carefully, these fees can outweigh the benefit of the card. Few tips:

  • If you have a card with an annual fee, make sure you evaluate its worth carefully

  • If you have a credit card with perks like purchase protection, rental insurance or access to airport lounges, make sure to use them! What’s the point of having these cards if you don’t take full advantage of its benefits

5) Monitor Credit Report Regularly

Credit cards are very vulnerable to fraudulent or a erroneous transactions. We always have a few in our wallet and use it for most of our transactions. As such it is very important that you monitor your credit report. The Fair Credit Reporting Act entitles everyone to one free credit report a year through their website, however there are several free services that let you check your credit report more frequently.

  • Create a routine of checking your accounts online regularly to make sure your recent charges look familiar

  • Consolidate all your transactions with free online software like Personal Capital or Mint so you can monitor all your charges from one portal

  • Sign up with a free credit monitoring services like Credit Karma. They’ll send you alerts if they see irregular activities.

Are you a responsible credit card user? What are some of your tips to being a responsible credit card user?