Having access to a credit card is useful on many levels. You can take advantage of points and rewards programs with every purchase you make, and you can even borrow against your card when money is tight. And you can use your credit to help build good credit with every purchase you make.
At the end of the day, having a credit card in your wallet can be an effective tool for your overall finances.
But how you use your credit card makes all the difference. While being responsible with your credit card can do wonders for your credit, using it irresponsibly can have a dire effect on your financial health.
To make sure your credit card works for you and not against you, consider the following tips.
Don’t Spend Your Credit Limit
If you’re wondering how to use a credit card wisely, one of the first things you should know is that it’s never advised to max out on your credit limit. Just because you’ve been approved for a certain limit doesn’t mean you should spend the entire amount. Not only will you be responsible for paying interest on that larger sum of money, you’ll have a much bigger bill to pay at the end of the month.
Not only that, but your credit score will also be affected if you max out on your limit. This score is comprised of five important factors, one of which is your credit utilization. This is the ratio of the balance on your credit card compared to your limit and measures how much of your credit limit you use every billing cycle. For instance, if your credit limit is $5,000 and you spend $3,000, your credit utilization ratio would be 60%.
It’s typically not recommended to spend any more than 30% of your credit limit in order to keep your credit score safe. The lower your credit utilization ratio, the better.
Pay Your Bills in Full and on Time
While it’s possible to make only minimum payments every month, it’s usually not recommended to carry a balance from one billing cycle to the next. You’ll only be mounting your outstanding balance, which is charged interest. The more you spend, the more this balance will continue to mount. Making only minimum payments every month can make it increasingly difficult to pay down your credit card debt.
Knowing how to use credit cards wisely means understanding the importance of going into each billing period with a clean slate. Not only does this mean that you won’t have high credit balances every month, but it can also keep your credit score healthy.
Paying only the minimum on your credit card can impact your credit utilization. While making your minimum payments on time in itself is fine, this tactic will only reduce your balance by a small amount and leave you with a high credit utilization ratio.
Borrow Only an Amount You’re Able to Repay
A credit card isn’t a magic piece of plastic that offers you free money to spend as you please. At some point, you have to pay that money back – with interest. Consumers wondering how to use a credit card wisely should understand the basic yet important concept of only spending what can easily be repaid each month.
If you are really only able to pay back $500 a month, you shouldn’t spend any more than that. In fact, you shouldn’t even spend anywhere near that limit to make sure there’s room for the unknown. To help you stay on top of your expenditures, make it a point of tracking your spending so you stay within your budget every month.
Use a Rewards Credit Card
Many credit cards offer rewards programs that provide incentives – usually in the form of miles, points, or even cash – for every purchase made. The more money you spend, the more rewards you will accumulate. If you use your card for many of your purchases, having a rewards card can put a little more money back in your pocket.
But not every rewards credit card is necessarily suitable for every consumer. The card you get should ideally offer you the type of rewards that you actually use. For instance, if you’re an avid traveler, it might make sense to get a card that offers points to be used towards hotels and airfare.
Make sure you thoroughly scope out a credit card’s rewards program before applying for it.
Protect Yourself From Fraud
Every day, someone in the US is victimized by credit card fraud. Theft can happen in all sorts of different ways, from the obvious physical theft to more sophisticated hacking. Many times it’s difficult to prevent credit card fraud, but it’s certainly possible to reduce the odds of it happening to you.
One of the ways to use a credit card wisely is to protect yourself from credit card fraud, which can be done by adopting a few measures, including the following:
- Never sign blank credit card receipts;
- Review every credit card statement each month;
- Report any suspicious transactions to your credit card provider;
- Keep a close eye on your card during every purchase and transaction;
- Be careful about giving away your credit card number over the phone or via the internet, and only do so with reputable institutions.
Although there isn’t a failsafe way to avoid every instance of credit card fraud, implementing some practices can help lower the risk.
What’s the Difference Between a Credit Card and Debit Card?
For some people, a credit card is probably a risky tool to have easy access to. Whether they don’t have a steady income to support timely payments or are simply not self-disciplined enough to use a credit card wisely, credit cards might not be such a great idea.
Instead, what these individuals should be looking at is a debit card. Unlike credit cards, debit cards only allow you to spend up to the amount that you physically have in your bank account. You can’t spend more than what you have, which is a safer situation for those who have a tendency to spend well beyond their means.
Final Thoughts
Consumers should be asking themselves how to use credit cards wisely in order to ensure they’re responsible with them. After all, keeping your finances healthy requires good habits. Your finances and credit score depends on how you manage your expenditures and debt payments, and your credit card plays a key role in this scenario. Having a credit card is a privilege, so make sure you’re responsible with it.
