Yahoo Finance 6 Good Credit Card Habits to Start Now
We've all been there: You open your latest credit card bill, and it is twice as much as you were expecting. Your first impulse may be to cut up your credit cards, lock them in a drawer or cancel them at your first opportunity. While getting your finances in order should be your top priority, credit cards are an important tool for building your credit history.
Studies show that people who use credit cards tend to spend more than people who use cash. But credit cards offer more consumer protections than cash or debit cards, plus they offer rewards, such as points for free travel or cash back bonuses. Whether you are dealing with debt or find yourself constantly overspending, there are some habits you can start today to help you get control of your finances.
[See: 8 Ways to Maximize Your Credit Card Rewards.]
Deal with your debt. If you are dealing with credit card debt, paying it off can seem impossible. It is important to make a payment plan and stick to it. Get into the habit of setting aside a certain amount every month to go toward your credit card debt. Because of interest, setting aside the same amount each month may not be enough. For example, if you have a balance of just $1,000, your minimum payment would start at an easy $25. If you only pay the minimum, it would take you more than nine years to pay off that $1,000 balance (assuming an 18 percent interest rate). Plus, you would end up paying more than $900 in interest. Paying $35 every month would drop your payments to around three years, and your interest to around $300.
Another way to get out from under debt is to take advantage of a balance transfer offer. Balance transfers allow you to transfer your balance from a card with a high interest rate to a new card with a lower interest rate. Some cards offer zero percent introductory rates for new cardholders that can be anywhere from nine months to 21 months, depending on the card. This means that you can set a payment plan and not earn interest. With that $1,000 balance, you could pay $50 a month for 21 months, and your balance would be paid off without any added interest fees.
[See: 10 Easy Ways to Pay Off Debt.]
Track your spending. Your credit card bill should never be a surprise. To keep track of your spending, take advantage of the tools your credit card issuer offers. Sign up for text and email alerts through the credit card website to monitor your spending. Some credit card issuers offer smartphone apps where you can get a real-time view of your spending and your balance.
Pay balances in full. If your main goal for using a credit card is to earn rewards, then it is important to pay your balance in full every month. Credit cards offer enticing sign-up bonuses, cash back rewards and the opportunity to earn free trips. But every time you carry a balance, the value of all those rewards decreases. Credit card interest rates for rewards cards are usually higher than interest on other credit cards, so to get the most out of your spending, it is important to avoid carrying a balance. If you find yourself carrying a balance, you might want to consider a different card with a low interest rate.
Pay your credit card bills on time. Paying a bill late, or missing a payment altogether, can cost you more than just late fees. Missed payments can directly affect your credit score. This can impact everything from the rate you get on a mortgage or car loan to whether you qualify for a new credit card. Avoid any negative impact to your credit rating by making even the minimum payment, which could save you hundreds of dollars down the line if you're financing a new house or car. If you want to guarantee that you never miss a payment, you can setup automatic payments through your credit card's website.
Use fewer credit cards. The number of credit cards you have can affect your finances in obvious and not-so-obvious ways. The more cards you have, the more likely it is that you'll lose track of your spending or miss a payment. Having a lot of cards can impact how the credit bureaus calculate your credit rating, lowering your score. A good rule of thumb is to keep your oldest card, then use the cards that match your spending habits. Because closing accounts can also negatively impact your credit score, you might want to lock the ones you don't use in a drawer. If you'd rather close them, know that you'll take a short-term hit on your credit score. Rather than cancel them all at once, spread it out over time.
[See: 12 Simple Ways to Raise Your Credit Score.]
Find the right rewards card. Rewards credit cards are a great way to earn cash back or airline miles for the spending you do every day. The key is to stay within your budget. Never overspend to earn more rewards. Keeping a balance will reduce the value of any rewards. More importantly, not matching your card to your spending habits and financial goals can lower the rewards you earn or lead to earning rewards you never use.
Shop for a rewards card that best fits your finances and normal spending. If you find that you travel a lot, find a card that earns you bonuses for travel. If you find that you fly the same airline, research that airline's branded cards. If most of your spending is at restaurants or grocery stores, consider a cash back card that offers bonus rewards for your spending. Your spending and goals can change over time, so make a habit of evaluating your cards to make sure they are still the right ones for you.
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