6 Credit Card Tips All Cardholders Should Know
If you take out a credit card, you will want to make sure you don’t borrow more than you need to, that your card is matched to your spending habits, and that you spend within your means to avoid crippling credit card debt.
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Credit cards are a powerful tool that can help you build good credit and earn rewards. Unfortunately, when not used responsibly, credit cards can hurt your credit score and cost you a fortune.
Credit cards are ingrained into society as we know it, and just about anyone who earns money has at least one credit card. Despite this, plenty of people get the wrong idea about credit cards, or they follow bad practices that can later affect their ability to find housing, qualify for other types of credit, or even get a job.
To make sure you use credit cards in a way that improves your long-term financial outlook, check out these credit card tips.
6 credit cards tips to consider:
- Research Multiple Cards Before Making a Choice
- Calculate the “Value” Of Points and Rewards
- Determine Your Expected Needs
- Begin Building Credit Early
- Use Notifications, Alerts, and Other Account Tools
- Spend Within Your Means
Research Multiple Cards Before Making a Choice
There are hundreds, if not thousands, of credit cards out there, and you want to make sure the cards you use are both affordable and provide you with the best rewards and perks.
>> Read More: Compare the best credit cards
Researching different credit card offers is important, and some of the key things to look for before you sign up include:
Find out the interest rate on purchases, balance transfers, and cash advances. If you expect to carry a balance from time to time, the interest rate is the single most important factor in picking a card because how much you pay in interest can outweigh the value of any rewards.
>> Read More: Credit card interest rates
Terms and Fees
Credit cards have different terms and conditions from one card to another. For example, some (but not all) charge high late fees and impose penalty APRs if you miss a payment. Look carefully at the fine print to fully understand the agreement each card issuer is offering you.
In addition, find out whether the card charges an annual fee, as well as other extra costs like foreign transaction fees when you use your card abroad. Annual fees might be worth it depending on signup bonuses and other perks, but you’ll need to weigh the value of each before deciding. Some annual fees might be waived the first year.
Many credit cards reward you for spending. These rewards come from cash back credit cards, travel credit cards, hotel credit cards, and more. Make sure the rewards are well-matched to your spending habits. For example, some cards offer bonus rewards for gas and groceries while others offer bonuses for restaurant purchases.
Think about how you tend to spend your money and find a card that gives you the most generous rewards for the spending you do most often.
New Cardmember Bonuses
It’s common for credit card companies to offer valuable signup bonuses for new cardholders, such as a certain number of miles if you meet spending requirements within a specified timeframe after the card’s been opened.
See if the card offers other perks and benefits, such as a credit for airline incidental costs; access to airport lounges; free upgrades in hotels; roadside assistance; car rental insurance; travel concierge; and more.
By considering these factors for cards you’re interested in, you can find one that’s well-matched to your habits and needs. You can choose a card with a low APR if you’re going to carry a balance, which could save you a fortune in interest; alternatively, you can pick a card that rewards the kind of spending you do most often in order to maximize your rewards.
Calculate the “Value” Of Points and Rewards
Different cards offer different kinds of rewards programs, so you may need to calculate the value of said rewards when you’re comparing card offers. The value can vary based on how you redeem the points, whether you choose free travel or hotel stays, statement credits, gift cards, or merchandise.
To calculate the value of credit card rewards points, you’ll need to know both how points are earned and your options for redemption. For example, if the rewards rate is 1:1 and you can redeem 500 points for a $50 gift certificate, each reward point would be worth 10 cents. (Note: Generally, points and miles are worth about a penny apiece, although this can vary widely.)
You may find some cards have far more valuable rewards programs than others. At first glance, these cards may seem attractive, but be sure to look at the big picture. Cards that are generous with rewards often charge high annual fees or have high interest rates.
If you’ll spend enough to make up the cost of the annual fee with the extra rewards you earn, and/or you don’t tend to carry a balance, these rewards-heavy cards may be worth it. But if you don’t spend very much and will earn minimal rewards, or think you might be unable to pay your monthly balance in full, you should steer clear.
Determine Your Expected Needs
When considering opening a credit card, you should also think about how that card will fit into your financial life and whether it’s a good idea to apply for more credit.
Just because you’re able to get a credit card with a high credit limit or a generous rewards program doesn’t mean you always should apply for the card. You don’t want tons of available credit at your disposal if you tend to overspend because you could risk getting into too much debt and having a hard time paying it back.
It also doesn’t make sense to get a card that provides generous perks or rewards if you don’t think you’ll use them. For example, if you rarely travel, it makes little sense to get a card that offers miles on every purchase.
Begin Building Credit Early
While you don’t want tons of credit cards if you can’t use them responsibly, it is important to get at least one card for the purposes of building credit. The sooner you get a credit card and start building a positive payment history, the higher your credit score will be — and the better rates you’ll get on other types of credit such as mortgages.
Getting a credit card helps you build credit in a number of ways:
- Your payment history accounts for 35% of your credit score. If you make even one small purchase each month on a credit card and pay it off in full, you can develop a long history of on-time payments.
- Your credit utilization ratio accounts for 30% of your credit score. As your credit limit increases over time as you demonstrate responsible card usage, you can decrease your credit utilization ratio and boost your score.
- The length of your credit history accounts for 15% of your credit score. The sooner you open a card, the longer the credit history you’ll have.
- Inquiries account for 10% of your credit score. When you apply for credit, you get an inquiry on your report that stays for two years. Too many inquiries can hurt your score. If you apply for credit early, your inquiry will drop off in two years, ideally before you start shopping for other loans like mortgages.
- Having a mix of different kinds of credit accounts for 10% of your credit score. Your credit card is one such type of credit.
As you can see, opening a card ASAP will help you to improve almost every factor that determines your credit score. There’s no reason to wait.
Use Notifications, Alerts, and Other Account Tools
When you get a credit card, your credit card issuer will probably offer you helpful account tools, which may include notifications when payments are due, alerts if you’re getting near your credit limit, mobile apps for checking your account on the go, and free access to your FICO score and credit report.
You should take advantage of all these tools to make sure you’re using your card in a responsible way. Missing a payment or going over your credit limit could trigger fees and do damage to your credit score. Alerts help you to make sure this never happens.
Spend Within Your Means
No matter what credit card you get, the single most important thing is to make sure you do not spend more than you can afford to pay back. Credit card interest can add up quickly, and if you pay only the minimum amount due every month, you could end up in debt for years to come.
Say you have a credit card with a $3,000 balance, a 17% interest rate, and a minimum payment equaling the greater of $25 or 3% of your outstanding balance. If you only paid the minimum payment, it would take you more than 10 years to pay off the card. During this time, your total interest charges would equal $2241.14.
Unless you want to waste thousands of dollars and be stuck with another monthly payment for more than a decade, make sure to always spend within your means.
Using your credit card to build credit and earn rewards can be a smart financial decision. But carrying a balance can end up costing you a fortune in interest, and you don’t want to pay high annual fees for a card that won’t pay off.
Shop around carefully to find a card that makes sense given your lifestyle — and make sure you always pay your bill in full (when possible) by the due date.
Author: Christy Rakoczy
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