Getty Images Stock Photo
Credit cards are the most marketed loan product. American Express says, “Don’t leave home without it!” Capital One wants to know, “What’s in your wallet?” Visa says, “More than a credit card. It’s trust, security, acceptance, and inclusion.” Visa further states, “Visa. It’s everywhere you want to be.” Discover says, “It pays to Discover.” Mastercard says, “There are some things money can’t buy. For everything else, there’s Mastercard.”
Credit cards, electronic payments, and “Buy Now, Pay Later” have become an integral part of modern financial transactions being billed as offering convenience and flexibility. There are many merchants that no longer accept cash as a payment option. You have to use your card to complete your purchase—be it a debit card or a credit card. When you use your debit card, you use money currently in your checking account. When you use credit cards, you’re effectively taking out a loan. Misusing credit cards can lead to a web of debt and financial pitfalls.
When it comes to credit cards, I generally offer a few warnings: Don’t play with plastic (credit cards), because plastic can smother you! Use credit only when absolutely necessary! I’ve also established guardrails to use when using credit cards. Namely: Stay away from department store credit cards because the interest rates on those cards are near 30 percent. Never carry more than 2 credit cards with a $2,000 credit limit on each. Never allow the credit card balance on either card to be more than 30 percent of the limit. Therefore, you’ll never have a balance higher than $600 on either card at any given time. Doing this will ensure you’re not mired in credit card debt while at the same time help keep your credit score intact.
In this article, I’m going to offer objective advice detailing do’s and don’ts of navigating the world of credit cards. The goal with this article is to provide essential tips to help you manage credit cards responsibly and build a strong financial foundation.
Do Understand Your Credit Card Terms:
Before applying for a credit card, thoroughly read and understand the terms and conditions. Read both, the big print and the small print for what the big print offers you, the small print takes it away. Pay attention to interest rates, annual fees, grace periods, and any potential penalties. Know that the interest rates on most credit cards are DOUBLE DIGIT! Being aware of these details will help you make informed decisions and avoid unexpected charges. My guardrail of never having a balance more than $600 on a credit card will balance if paid off timely.
Do Pay Your Balance in Full and On Time:
Sixty percent of Americans carry a credit card balance from month to month. Paying your credit card balance in full and on time each month is one of the most crucial do’s. By doing so, you can avoid accumulating interest charges and late payment fees. Timely payments also positively impact your credit score, demonstrating responsible credit management.
Do Set a Spending Limit and Stick to It:
Treat your credit card as a part of your budget, not as an extension of your income. Not as your emergency fund. Not as a tool to buy stuff you can’t afford. Set a monthly spending limit that aligns with your financial goals and income. Avoid making impulsive purchases that could lead to debt beyond your means.
Do Keep Track of Your Spending:
Regularly monitor your credit card statements to track your spending and detect any unauthorized transactions promptly. By identifying unauthorized transactions promptly, you’re more likely to be free of liability for those charges. Mobile apps and online banking make it easier than ever to stay on top of your credit card activity.
Don’t overspend on credit cards to earn point and rewards:
Many credit cards offer rewards, such as cashback, travel miles, or points. Keep in mind the cashback rewards are worth anything from a penny to a nickel per every one dollar spent. Not enough to use a credit card for the mere sake of racking up points. Avoid overspending just to earn rewards, as it may lead to unnecessary debt.
Don’t Carry High Balances or Max Out Your Credit Card:
High credit card balances can quickly accumulate interest, leading to mounting debt. Aim to keep your credit card utilization (the percentage of available credit used) below 30 percent to maintain a healthy credit score. The lower your utilization rate, the better.
Don’t Apply for Multiple Credit Cards Simultaneously:
Each credit card application generates a hard inquiry on your credit report, which can temporarily lower your credit score. Apply for new credit cards strategically and only when necessary.
Don’t Ignore Credit Card Statements:
Failing to review credit card statements can lead to missed payment deadlines or fraudulent charges. Always verify your statements and promptly report any discrepancies to your card issuer.
Don’t Use Credit Cards for Cash Advances:
Cash advances come with higher interest rates and additional fees. Whenever possible, avoid using your credit card to withdraw cash, as it can lead to a debt spiral.
Don’t Co-Sign Credit Cards:
Co-signing for someone else’s credit card can have severe implications if they miss payments or accumulate debt. If you decide to ignore this advice and co-sign anyway, be fully prepared to take responsibility for the entire debt if the person you cosigned for fails to pay.
Banks make more money on credit card interest than they make on any other loan they offer including personal loans, student loans, business loans, car loans, and mortgages. Banks also make more money on credit card interest than they earn on the money they invest in the stock market. Clearly, they want to encourage you to use credit cards. By following the do’s and don’ts outlined in this article, you can navigate the world of credit cards with confidence. Remember, responsible credit card management is an essential part of achieving long-term financial success.
(Damon Carr, Money Coach can be reached @ 412-216-1013 or visit his website @ damonmoneycoach.com)