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Many people think credit cards are dangerous.
They try their best to stay away from them and only use their debit card.
But did you know that credit cards can be more beneficial than debit cards if you use them properly? They carry tons of rewards that can help boost your savings.
Today, I’m going to show you the best tips you can implement to use your credit card wisely. Follow these tips and you won’t have to think credit cards are dangerous.
Pay Your Balance Every Month On Time
Let’s start with the most important rule when it comes to using your credit card wisely. You need to make sure to pay off your balance in full every month.
The easiest way to go into debt is by carrying a balance, and debt is something you want to avoid in order to build wealth.
The average credit card interest rate is a whopping 16% for existing accounts and 20% for new accounts. In other words, if you carry a balance over to the next month, the credit card will charge you 16% or 20% on your balance until you pay it off. At an interest rate that high, carrying a balance will exponentially compound and pile up.
Late payments can not only put you in debt but also lower your credit score. Did you know that your credit score can drop up to 180 points if you’re late on your payment? Your late payments typically won’t get reported until 30 days or later, so you have some grace period until your score drops.
But this is still something you can easily avoid.
Here are a couple of ways you can make sure you’re paying your balance in full every month.
Set up autopay or notification alerts
Most credit card companies offer a function to autopay your balance each month. This means that your money will be withdrawn from your checking account to pay off your credit card automatically.
This is a great function to use if you have a regular salary. But for those who have irregular salaries or spending habits, you’d be better off setting up notification alerts.
This is because your credit score may be affected if autopay triggers but you don’t have enough money in your bank account.
Setting up notification alerts won’t automatically pay off your balance, instead, it’ll send you a notification to remind you to do so.
You can set both of these up on your credit card company’s website.
Move the balance due date
Did you know that you can change the date your balance is due?
If your finances would be better off with a different due date, you can log into the credit card company’s website and change it in your settings.
Many credit card companies only allow you to change this date once every six months, so choose wisely.
Ask credit card company to waive interest fee
If you accidentally forgot to pay off your balance and start racking up interest, your credit card company may waive the fee if it’s your first time.
Call customer service and ask if they can look into possibly waiving the fee. But remember, be polite about it!
Use Your Credit Card Like A Debit Card
This is one of my personal tips that I like to implement when using my credit card wisely. It’s a simple psychological trick.
I like to think of my credit card as a debit card. If I always use my credit card like a debit card, I’ll only spend what I can currently afford.
If you only have $2,000 in your checking account, you can only spend $2,000. If you were to go over this limit, you’d already be breaking rule number one.
Use this little mind trick and think of your credit card as a debit card. You won’t have to worry about overspending.
Keep A Low Utilization Ratio
Every credit card comes with a cap on how much you can spend. Does that mean you should max out spending each month, as long as you’re paying it off properly? Not exactly.
In order to maintain a good credit score, you should aim to keep a utilization ratio of 30% or less. In other words, if your credit card has a limit of $10,000 you should keep your spending at $3,000 or lower.
When the bank gives you a credit card, they’re lending you risk. Maxing out your credit card would indicate to lenders that you’re not good at handling risk, and they’d probably end up giving you a higher interest rate.
On the other hand, keeping your utilization rate low indicates to lenders that you’re responsible and handle risk well. They would in turn give you a lower interest rate if you ever apply for a loan.
Bypass this rule
If you find yourself needing to spend more than 30%, you have two options. You can either open another credit card or pay off your balance before your statement cycle ends.
Getting approved for another credit card would increase your credit limit. Therefore, you would be able to spend more before you reach 30%.
You can also pay your credit card off twice per month. Your credit card usage only gets reported once a month at the end of your statement. If you were to pay off your credit card before your statement ends, the amount you paid off wouldn’t get reported.
Choose A Credit Card That Aligns With Your Spending Habits
Different credit card companies offer different types of benefits. It’s important to choose a credit card that aligns with your spending so you can reap the most benefits.
For example, a credit card may offer 3x points for grocery shopping and only 1x points for travel. If you’re someone who likes to travel, you may be better off finding a card with higher points for travel.
I spend a good portion of my salary on groceries, so I use a credit card that gives me 5% cash back at grocery stores.
Taking advantage of credit card rewards that align with your spending can save you a good amount of money.
Here are some examples of rewards that credit cards offer:
- Miles for travel
- Cash back you can deposit to your account
- Points you can use to buy things or exchange for cash
Many credit cards also have other benefits such as rental car insurance and phone insurance. Make sure to read through the fine print to see all the benefits they offer.
Don’t Apply For Too Many Credit Cards At Once
Whenever you apply for a credit card, the credit card company performs a hard credit inquiry. This inquiry impacts your credit score by a few points and stays on your record for around two years.
After applying for a single credit card, your credit score will usually drop a few points but will go back to the usual in a couple of months.
However, applying for too many credit cards means that your score will drop by that much. For example, if you apply for five credit cards at once, your credit score will incur five hard inquiries which can heavily affect your credit score.
Also, multiple hard inquiries in a short period could be perceived as high-risk, so lenders might be more reluctant to give you a loan.
Just make sure you’re only applying for a reasonable amount of credit cards in a short period. There is no set rule, but it’s generally good to wait 90 days before opening a new credit card.
Check For Foreign Transaction Fees
If you frequently travel abroad, you’re going to want to get a credit card with no foreign transaction fees.
Credit cards are a safe way to make purchases when you’re traveling abroad, but some charge a foreign transaction fee. This fee can range from 1%-5% and applies to every transaction made in foreign currency.
Read the fine print of your credit card to make sure you’re avoiding those pesky little fees, especially if you’re a frequent traveler.
Some vendors in tourist areas will offer an option to pay in your home currency. However, this option will generally give you a much worse conversion rate. Stay away from those and always choose to pay in the local currency.
Conclusion
A credit card is not dangerous if you use it properly. It only becomes dangerous when you buy things you can’t afford.
All you have to do is follow the tips outlined in this post to use your credit card wisely. You’ll be on your way to building a great credit score and also taking advantage of the rewards and benefits they offer!
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