Are You Using the Right Credit Card?

According to a report by CNNMoney, consumer reliance on credit cards is on the rise. The statistics used by CNNMoney were provided by First Data, a credit card processing business. Since the end of 2008, when consumers began relying more heavily on debit cards to make purchases, credit card use has been down. That all changed in April of this year when retailers noticed an uptick in the number of persons applying for credit and using credit to make purchases.

I thought this would be a great time to talk about the ways to use a credit card and receive the perks without going into debt.

Only charge what you can afford to repay in full.

This rule is an oldie, but a goody. I know the premise behind using the card is that you can buy now and pay later; however we have really seen that backfire over the last few years. In the United States, having good credit is a necessity.  You can build or maintain good credit by paying your balances off in full every month. The key is that your card is active and you always pay on time.

Carrying a balance can be dangerous for several reasons:

1. 1. Sudden unemployment or drop in income. How will you pay the debt off?
2. 2. The more of your available credit limit you are using, the harder it is on your credit score. The most you want to use of your available balance is 30%. On a card with a $10,000 limit, that is $3,000. Are you prepared to pay off $3,000 tomorrow? If not, bring that balance down.
3. 3. Having a high balance to credit limit ratio can also put you in jeopardy of going over the credit limit. This can happen if interest is applied to the account and you receive an over the limit fee or if you miss a payment and receive a late fee.

Speaking of Credit Card Perks

Did you know that, on some credit cards, if you miss a payment or are late on a payment you will lose you points for the month? It is true. So, if you are using your card to earn points, that is even more incentive to make sure your balances are reasonable and you can pay them on time, every time.

In addition, some credit cards offer cash back rewards which can add up to a substantial sum. However, be sure to read the fine print. There may be limits on the amount you can earn or even expiration dates where if you haven’t earned enough points/cash/rewards by a certain date – you lose them. This is very common on cards that offer seasonal savings (back-to-school, home improvement, etc.).

Finally, there are limits to many credit card perk programs. Some offer cash back on things like gas or groceries, but if you spend too much on those items the amount you get back is actually LOWERED. In addition, many cards offering cash back have a ceiling that you must hit in order to get the best cash back rate. For instance, the offer reads, “Earn 2% cash back.” The fine print reads, “If you charge at least $4,000 annually.” Reading the fine print is very important when it comes to credit card offers.

Keep Balances Low

I know we covered this above, but it bears its own section. In order to maximize your credit score and avoid debt, keep your balances at 30% of less of the available credit limit.

Avoid Applying for Several Credit Cards

The rule of thumb here is no more than two credit card application is a 24 month period. This is even if less if you have a very short or troubled credit history. Applications for credit cards and store cards can bring down your credit score and lead lenders to believe that you may have trouble handling unsecured debt.

Make Your Payments on Time

I know this goes without saying, but it is too critical to leave out of this blog. Your payment history accounts for over 1/3 of your credit score. It is important to stay up-to-date on your bills. Late payments will hurt your pocketbook and do serious damage to a credit report and score. The only thing that can undo the damage is time.

Knowing how to manage your unsecured debt is critical in this day and age. There are so many aspects of our lives that are impacted by our credit. From certain employment eligibility, to auto insurance rates, our credit, or lack thereof, can either help us succeed or hold us back. If you or someone you know has questions about credit or how to manage their debts, give us a call today. Call 1-888-282-864-8659.

Published Dec 5, 2011.