So you’ve decided to get a credit card. How grown up of you! Maybe you have financially savvy parents who were open about their finances and taught you how to use plastic in the safest way possible. Or maybe your dad routinely requested an increase in his limit and swiped, swiped, swiped. I’m not sure which category you fall in but let me teach you how not to ruin your life.
(It’s important that I acknowledge that this advice, like any other advice, may not be applicable to everyone. Some people will use credit cards because they’re between jobs and need to live until their next opportunity. However, these are unusual circumstances and the average credit card user is not necessarily faced with that choice. Happy reading!)
- Find a card with cash back or other great rewards. They want you business, it’s only fair that they sweeten the deal. Who doesn’t like being rewarded?
- Pay your bill in full every month. This will help you avoid interest, late charges or any other fees associated with using a credit card. It also helps prevent it from piling up and getting out of control. Credit card debt in America totaled $847 BILLION in 2013. I don’t now about you, but that sounds like a lot of money to me.
- Bonus: If you do 1 and 2 combined, you will actually be getting paid to use free money. Think about it, 1.5% cash back + $0 in interest. I’m no genius but you see what I’m getting at.
- Pay your bill on time. You could be paying an extra $30 per statement on late charges. If you want to give away fre money, ask me for my PayPal. The billion and trillion dollar banks do not need it.
- Do not get a card with an annual fee unless the rewards far outweigh the benefits. Otherwise, it’s more money down the drain for something you’re not maximizing. And if you DO have an annual fee, get acquainted with all of your perks. All of them. Your fee is paying for those and you don’t want to leave anything on the table. Use the concierge, cash in the points, check you bags if it’s a travel card, etc.
- Don’t double pay. Some credit card companies will offer road side assistance as part of their incentives. Are you paying for an auto club? Are you paying more to your insurance company for the same service? If you already have it built into your card, don’t spend the extra money for the same service to another company.
- Know your warranties. Higher end credit card like AmEx will provide an extended warranty some items you buy on the card. If that’s the case, why are you paying the store for something that is already covered? Not to mention, you have a manufacturer’s warranty anyway. Granted, AmEx may place a limit on how many claims you can file or a maximum amount. But if you’re breaking that many things a year, maybe you should chill out on the shopping until you’re less accident prone.
- Don’t close your oldest credit card. It has the best snap shot of your payment history and your usage of credit. It’s your best advocate. Don’t eliminate it.
- Don’t overspend. Credit cards are not intended to expand your purchasing power. The main point of the card should be to tell interested parties (potential mortgage lenders or car financiers) that you know how to act when you have your hands on other people’s money. If you intended to get a $50 purse because that’s all you can afford, it doesn’t mean that you should spend $100 if you decide to use your credit card rather than the 50 you had in your pocket. Because sooner or later, usually within 30 days, you get a bill and you will eventually have to pay for it. If you didn’t have $100 this month, you may not have it next month either. Use your card to build credit and get rewards. Not to live a life you can’t afford.
- Mind your line. Keep a close eye on your credit line. Few things will hurt you as much as maxing out your card or even getting dangerously close to your limit. If you were approved for a $7,000 line, I highly recommend you don’t buy your lady a $6,500 engagement ring on that card. When it’s time to buy a house and the bank has to run your credit, she’ll thank you for it.
- Stay away from cash advances. The average credit card interest rate nationally is 15%. If you want to see how bad cash advances are take a look at my own monthly bank statement below. My regular interest rate is 7.24%, however, advances, which are non-purchases, have an interest rate between 16 and 21 percent, more than twice what my normal rate is. Now think about someone with less than ideal credit who’s starting out with a base interest rate of 15%. Do you really want to be paying 30% on cash advance?
I’m sure I’m forgetting something… let’s hear it! How do you use credit?
I’m adding this update to illustrate one of the multitude of reasons it’s important to avoid, manage and/or conquer debt (depending on what stage you’re in). Personal stories that aren’t overshadowed by statistics are so important. Read about one here.
(Originally published on 10/10/15, updated on 10/11/15)