How to Use Credit Cards Wisely
Credit cards are a necessity these days if you want to shop online, make a major purchase or rent a car. But credit cards can also be a double-edged sword if you don’t use them wisely. It’s key to not only pay your bill on time but to take other beneficial steps so you’re making the most of your card.
Here are seven tips on how to use your credit card for your benefit.
1. Look at Rewards When You Compare Credit Cards
Many credit cards offer rewards programs that can save you money if you use them correctly. Two of the most common rewards programs are cash back and rewards. You’ll want to choose the best credit card for your needs before you fill out your credit card application, so you can get benefits you’ll actually use.
Cash-Back Credit Cards
Cash-back cards will give you back a small percentage of the amount you spend, either by sending you a check or applying a credit to your account. Sometimes the amount will vary depending upon the type of purchase.For example, some cards will give you more cash back when you use your card at a restaurant or a gas station. Some cards change the cash-back categories every quarter. The best cash-back credit card for you is the one that offers cash back for things you already buy.
Pay attention to how you can redeem your cash back. Bank of America credit cards give you an extra 10 percent bonus if you deposit your cash back into your Bank of America checking or savings account. You can deposit your cash back into your checking account, then turn around and pay your credit card bill from your checking account, and with that, you’ll have received an extra 10 percent cash back.
Rewards Credit Cards
Rewards cards give you points for each dollar you spend — usually one point per dollar, although they might offer two or three points per dollar in certain categories. Travel cards often give points that can be redeemed for flights, hotels and restaurants. If you travel frequently, a travel rewards card might let you take a free trip from time to time.
If you travel internationally, choose a travel rewards card that does not charge a foreign transaction fee. Using your U.S. credit card overseas can cost you as much as 3 percent on each transaction, wiping out the value of any rewards and then some.
Regardless of which type of rewards program your credit card offers, never make a purchase just to get the cash back or rewards points.
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2. Don’t Think of Credit Cards as Free Money
When you use your credit card, think of it as taking out a loan. The bank that issued your card is giving you temporary use of money. If you don’t pay it back by the time the bill is due, you’ll owe interest on that money. You’ll be charged interest every month until you pay it off.
Here’s a good rule of thumb for smart credit card use: Only purchase things with your credit card that you would purchase if you had to pay cash. When you use your card, subtract the amount you charged from your checking account balance, and then when the bill comes, you’ll have enough in your account to pay it in full.
Sometimes you’ll need to make a large purchase that you won’t be able to pay all at once. In this case, determine if using your credit card is the best option. If you’re buying furniture, for example, a credit offer from the furniture store might be more cost-effective. Understand the terms of any offer and compare it to the terms of your credit card to determine the best way to pay.
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3. Pay Your Credit Card Bill Within the Grace Period
You won’t be charged interest if you pay your entire balance by the end of the grace period. The grace period is the time between the end of your billing cycle and the payment due date. Credit card companies are required to send your bill at least 21 days before it’s due.
Here’s an example: Suppose you buy a new leather jacket for $400 on April 1 and pay with your Mastercard. Your billing cycle ends on the 15th of each month, and your payment is due on the 12th of the following month. The charge for your jacket appears on the bill ending April 15, so as long as you pay that bill by May 12, you won’t pay interest on your purchase. Remember, the billing cycle end date and the due date should appear on your statement.
4. Pay Your Credit Card Bill Online
You can be sure your payment will be credited on time if you pay your credit card bill online through the bank or credit card company’s website. If you mail in a check, you’re at the mercy of both the postal service and the payment processing department at the credit card company. A payment that is delivered late could result in an interest charge that could have been avoided by paying online.
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5. Use Your Credit Card to Build Credit
If you’re just starting out, or if you have made credit mistakes in the past, a credit card can help you build or repair your credit if you use it wisely. Pay your balance off in full each month. If you need to make a large purchase that you know you won’t be able to pay off at once, make more than the minimum payment. And don’t use up your entire credit line.
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6. Don’t Ignore the Annual Fee
The annual fee on a credit card used to be a fact of life, but now there are many no-annual-fee cards to choose from. If you’re comparing cards, factor in the annual fee if a card has one. Sometimes the fee can negate any rewards you might earn.
7. Keep Your Credit Card Safe
Part of using credit cards responsibly is protecting yourself from fraud. Don’t carry your credit card if you don’t need to. When you use your credit card to shop online, consider using a virtual account number if your card issuer offers it. This is a one-time-use number that keeps you from having to enter your actual account number on a merchant’s website.
Using credit cards wisely will help you build and maintain a good credit score, which can help you achieve larger financial goals like buying a home or starting a business. By carefully monitoring your credit card accounts, you’re making an investment in your financial future.
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