Credit cards can be an amazing financial tool, giving us the flexibility and convenience to use and leverage our money in the most efficient and cost-effective ways possible. If managed wisely, they offer a vast array of benefits including buyer protections, cash back or travel rewards on purchases, solid credit scores, and can even provide a simple way to monitor and track expenses to help us keep a firm handle on our spending.
Of course, credit cards also have a couple major drawbacks, especially if you’re not careful in how you manage them. For one, they carry significantly higher interest rates compared to other traditional loans, and if you spend more than you can afford it’s easy to fall into crippling credit card debt. If you’ve been there, you know that once you fall into this trap and interest begins to accumulate, it gets harder and harder to dig yourself out. Plus, the more credit card debt you have, and the closer you get to maxing out your credit card limits, the more it hurts your credit and credit scores.
There is a silver lining here, though. If you manage your cards the right way, you can avoid paying a penny in interest—ever. If you want to know how to manage your credit cards for maximum benefit, we’ve got eight credit card management rules that money-savvy consumers and financial experts live by.
1. Never Revolve a Balance
Seems obvious but it has to be said. If at all possible, pay off your credit card balance on time and in full, each and every month. If you want to avoid paying interest on any of your purchases, this is the most important credit card management rule to follow.
2. Know Your Credit Limits
Your credit utilization plays a significant role in your credit scores, which is why it’s important to know your credit limits and the percentage you’re utilizing at any given time. This gives you the ability to leverage your utilization percentage and boost your credit scores.
On average, consumers with the highest credit scores utilize only 7% of their available credit limits. Obviously, the higher your credit limits, the more leverage you’ll have here – but you don’t need to reach perfection when having a “great score” will give you the same benefits. You just want to keep your revolving utilization on the low end to keep your scores healthy, happy and high – not perfect.
Keeping an eye on your revolving utilization is important regardless of whether or not you pay your balance in full at the end of the month. Why? Because even when you pay your balance in full, the balance reported in your credit report will be the same balance from your monthly credit card statement – which is rarely ever ‘zero’ unless you decide to forgo using the card for 30-60 days while you wait for your credit card issuer to drop your next statement and report an update to the credit bureaus. All of which typically happens once a month.
3. One Card Is Good, but Two or Three Is Better
This may sound counterintuitive to many, especially if you have a tendency to spend more than you should. If the temptation of more than one card is a problem, then stick with one. But if you’re able to control the urge to spend, having more than one card gives you more choice and more flexibility with your money. Remember our little talk about revolving utilization? Having more than one card gives you a lot more room to leveraging your revolving utilization percentage. It’s also good to have a back up, or a specific card used solely for the purpose of earning cash back or travel rewards. How many cards is ideal? There is no “one size fits all” answer and the right number of cards will differ from person to person and financial situations, but two or three credit cards is usually enough for most of us.
4. Read the Fine Print
Before you apply for a credit card or read the terms and conditions first. Pay close attention to the interest rate and any fees associated with the card offer. Late fees, cash advance fees, balance transfer fees, foreign transaction fees – whatever the fees may be, it’s better to know about them up front because once you’ve applied for the card, you’re bound by the terms you agree to when you sign the dotted line on the application.
5. Say “NO” to Cash Advances
Taking out a cash advance on a credit card is just bad financial sense. Even if you have a decent interest rate on your credit card, the interest rate on the cash advance will be much higher, anywhere from 24.9% to 29.9%. And unlike regular purchases, cash advances don’t have grace periods that waive interest if the balance is paid before the grace period ends. You may also get hit with ATM fees or other transaction fees for accessing the cash. If you need cash, use your debit card at the ATM —not your credit card.
6. Charge Strategically
When you use your credit cards for purchases, you can get a lot more bang for your buck if you think strategically. If you’re charging or financing a large purchase, consider whether or not you’ll be able to pay off the balance at the end of the month. If not, would it make sense to take advantage of a 0% interest introductory card offer? Obviously, you wouldn’t want to do this for every purchase —you’d end up with too many credit cards and hurt your credit in the process. But if it’s a one-time purchase and it makes sense, an introductory offer could give you more time to pay (typically 6-12 months) without paying interest, so it’s something to consider.
Another strategic move is to use a specific card for everyday expenses you might normally pay for in cash to take advantage of cash back or rewards points. If you’re paying for it either way, why not take advantage of the extra perks from a cash back or rewards credit card? A secondary perk to using this strategy is how amazingly simple it makes it to monitor and track how much you’re spending and where. Paying in cash for a cup of coffee from Starbucks every day may not seem like much, but look at that same cup of coffee over a 30 day period – all lined up and easy to see in your credit card statement, and it sheds a little more light on exactly where your money might be going.
7. Know Your Interest Rate (& Negotiate)
Despite the stereotype that credit card issuers own their cardholders, if you manage your credit cards impeccably and have great credit, you have more power over your credit card issuer than you think. Especially when it comes to your interest rates. If your interest rate isn’t as low as you’d like it to be – or feel it should be, don’t be afraid to contact your issuer to request a lower rate. Even though the goal is to avoid paying interest at all, it’s still a good idea to keep an eye on your interest rate. And lower is always better when it comes to interest rates and it’s especially beneficial in the slight chance that you need to make use of it for an unexpected emergency, for example.
8. Read Your Statement Every Month.
It wasn’t until I attended a financial conference that I realized how few people actually read their credit card statements. In this case, a guest speaker and prominent finance expert polled the audience with this question and the response was shocking – less than a third said they did. Why is it so important to read your credit card statement every month? Two reasons: 1) Credit card issuers can change the terms– as long as they provide notice, which would be included in your statement. Due dates, closing dates, interest rates and fees are all subject to change and you need to know if/when they do. 2) Reading your statement every month helps you track where and how you’re spending. It also helps pinpoint theft or fraudulent charges.
Image: 401(K) 2012, via Flickr