How to Use Credit Cards Smartly
A little retail therapy never hurt anyone, unless you can't afford what you're buying. Before you finance something new with a credit card, we have some buy-smartly advice that could save you a lot of money and plenty of financial worry.
First, the Good News. Using your credit cards smartly is a great way to boost your credit score. Unfortunately, some credit card issuers make it challenging to stay ahead of monthly payments and easily fall into debt with credit card purchases. Thankfully, understanding the way a credit card works can help you avoid those traps.
A Credit Card Refresher
A credit card is a revolving line of credit allowing you to make charges at any time, up to a specific limit. Each time you use your card, the credit card issuer is lending you money so you can make a purchase. Unlike a car or home loan, your credit card account has no fixed repayment timeframe. Instead, you'll make monthly payments until the balance is paid off in full. At the end of each billing cycle, you can choose to make the minimum required payment, pay off the balance in full, or make a payment of any size that falls between these two amounts.
Pay the full amount
Paying anything less than full balance will cost you money. Credit cards tend to have high interest rates relative to other kinds of loans. Recent data from the National Credit Union Administration (NCUA) found that the average industry rate on new credit cards is 13.15% APR and the average credit union rate on new credit cards is 11.54% APR.
How can you stay ahead?
Pay Bills in Full and on Time
The best way to avoid interest payments and build your credit score is to pay credit card bills in full each month — and on time. This has multiple benefits:
• You'll build credit — Using credit responsibly builds up your credit history, making it easier and more affordable to secure a loan in the future.
• You'll skip the interest — Paying credit card bills in full and on time each month lets you avoid the card's interest charges completely.
• You'll stay out of debt — Paying bills in full each month helps prevent you from falling into the cycle of endless minimum payments, high-interest accruals, and a whirlpool of debt.
• You'll avoid late fees — Late fees and other penalties for missed payments can get expensive quickly. Avoid them by paying bills on time each month.
• You'll enjoy rewards — Healthy credit card habits are often generously rewarded through the credit card issuer with airline miles, reward points, and other fun benefits.
Financial tip: Using a credit card primarily for purchases you can already afford makes it easier to pay off the entire balance each month.
Understand the Billing Cycle
A credit card billing cycle is the time between subsequent credit card billings. It can vary from 20 to 45 days, depending on the credit card issuer. Within that timeframe, the issuer adds and subtracts purchases, credits, and any fees or finance charges.
When the billing cycle ends, the issuer will bill you for the remaining balance, which is the amount you see on your statement. The current dates and span of a credit card's billing cycle should be clearly visible on the bill.
It's important to know when your billing cycle opens and closes each month to help you keep on top of your monthly payments.
Credit card bills will also show a payment due date, which tends to be approximately 20 days after the end of a billing cycle. The timeframe between when the billing cycle ends and its payment due date is known as the Grace Period. When the grace period is over and the payment due date passes, the payment is overdue and will be subject to penalties and interest charges.
Never Miss a Payment…Ever
To ensure payments are never overdue, it's best to schedule a time for making your credit card payments each month. Ideally, you'll do this during the grace period and before the payment due date. This way, you'll avoid interest charges and penalties and keep your score high. Allow a minimum of one week for the payment to process.
Borrow (and spend) Smartly
Following these dos and don'ts of credit card spending can help you stick to your budget even when paying with plastic.
• When making a purchase, treat your credit card like cash.
• Remember that credit card transactions are mini loans.
• Pay for purchases within your regular budget.
• Decrease your reliance on credit cards by building an emergency fund.
• Use your credit card as if it provides you with access to extra income.
• Use credit to justify extravagant purchases.
• Neglect to put money into savings because you have access to a credit card.