Credit cards often get a bad rap due to their high interest rates and some people’s tendency to rack up thousands of dollars in credit card debt. However, if you use them properly, they can actually be a very useful tool. Renting a car, booking flights and ordering online are all things that would not be possible without a credit card. Here are some guidelines for making wise decisions about your credit card use.
Always pay off your balance in full
This is the number one rule of using a credit card and means that you should not be buying more than you can afford. Just because you have access to a high credit limit, doesn’t mean you have the cash to cover it. If you don’t pay off your balance each month, you will start incurring interest charges on any balance you carry. A good rule of thumb is to not charge anything you wouldn’t otherwise buy with cash. If you can’t pay in full one month because of an emergency, at the very least, you must pay the minimum and should definitely aim for more than that.
Consolidate your debt to pay it off on time
Credit card debts spiral out of control when you don’t follow the #1 rule above. If there is no way you are able to pay off this debt in full, consider consolidating your debt in the form of a personal loan. Personal loans are great for disciplining your repayment activity, because there is a certain amount of payment you have to make each month, and the debt has to end at a certain date. Definitely consider the interest rate, but don’t shrug off the loans with higher APR than your credit card, if you can’t promise that you will pay off your entire credit card debt by a certain date.
Pay on time
Paying your credit card company on time is a must! The company will report any late payments to the credit bureaus which could hurt your credit score. A lower credit score will put your ability to borrow in the future at risk or make borrowing more expensive through higher interest rates.
Watch your APR
If you cannot pay your balance in full, the most important thing you should be looking for in a credit card is a low APR. This means you won’t pay as much to your credit card company in interest each month. Forget rewards if you are not paying your balance in full because the money you are spending on interest will outweigh any benefit you get from rewards.
Take advantage of rewards
If you are paying your credit card bill in full each month, there’s nothing wrong with taking advantage of a good rewards card that offers a reward you are likely to use. They can be a great way to earn free flights, hotel rooms or cash back. However, if your rewards card carries an annual fee, just make sure that you are making enough back on the rewards to justify the fee.