The 10 Commandments of Credit Cards
Credit is something that all people deal with and unfortunately many worry about. Your credit score rates your level of risk to a lender, and a poor credit score can significantly impact some of the biggest financial decisions you will make. One of the most accessible (and most often abused) credit resources is your credit card. By understanding a few key principles, your credit card can be a great tool to positively impact your credit score.
1. Review your credit score and credit report at least once a year. Your credit is made up of two parts: your credit score (a numerical value from 300-850 that represents your riskiness to lenders) and your credit report (a full write up citing important details of your credit history). Your FICO credit score is likely available through your online banking or credit card website, which makes it easy to monitor. Your credit report is a little harder to obtain, but online resources like www.creditkarma.com allow you to run your credit report for free. You should review regularly for late payments and hard inquiries reported. Is any information incorrect? You can dispute a late payment or derogatory remark with the credit bureaus directly. Hard inquiries and total accounts listed should be monitored to ensure no unauthorized activity occurs.
2. Decide what card is right for you, and stick with it. Do you want your spending to rack up travel rewards for free airfare? Would you rather benefit from a cashback program? It is important to participate in a program that provides you with the best value. Do not just accept the offers that arrive in your mailbox, spend your time researching to find the right one. Then, once you find your card, stick with it. Do not fall for retail store sales pitches or promotional offers for cards that will not provide long term value. Keep it simple.
3. Utilize auto pay services. Establishing auto-payment on your credit card is the easiest way to avoid late payments, which has a great impact on your credit score over time (lenders want to see you paying your bill on time!). You can set up automatic monthly payments through your bank’s online bill-pay portal. It is best practice to pay your credit card bills through your bank website rather than storing your bank account info on your credit card websites. Banking websites are generally more secure and using one simple system is easiest to manage.
4. Review your bill and pay in full monthly. This is an important commandment, but for some may be a goal to work towards. Paying in full means never paying an interest fee, which on most credit cards is 14+%. If you are carrying a balance and cannot pay in full, create an intentional debt repayment plan to get on track. Also, consider how to break the spending cycle by tracking your expenses carefully (most credit websites have built in spending tracker tools). Most importantly, make sure you are reviewing your charges regularly to ensure no unauthorized charges (i.e. expired free trials or unused monthly subscriptions) are occurring.
5. Consider balance transfer promotions (if needed). If you are carrying a balance on your cards, balance transfer offers can be a great tool. These are promotional offers to open a new credit card to which you can transfer your current debt with a lower interest (sometimes 0%) for a specified time frame. You must apply for these offers and you should weigh your options carefully (most charge a small % on the total balance transferred or a flat fee). If you can save money on interest while you implement your repayment plan, a balance transfer card could benefit you greatly.
6. Negotiate your terms. Credit cards compete mercilessly with each other for business, so things like your APR (annual percentage rate) and other fees paid are certainly negotiable. If you are carrying a balance on your card, you can request a lower APR on the monthly balance. Also, if you miss a payment by a few days and incur a late fee, you can request a waiver or credit (normally $35+). If you are a good customer, they are likely to be flexible on your terms.
7. Monitor your credit utilization rate (and consider asking for a credit increase). Credit utilization is a big factor in your credit score, and it refers to the total balance you carry on credit vs. the total credit line available to you. It is recommended to keep your carrying balance under 30% (i.e. $3,000 on your credit card with a $10,000 credit limit) of your total limit. To lower this, you may do one of two things: reduce the amount you are putting on your credit card or request an increase to your credit line. You can easily request an increase with a phone call to your credit card’s customer service department.
8. Authorized users beware. Adding an authorized user to your credit card can be a benefit and provide convenience for partners or family members; however, it can also impact the credit score of a new authorized user. Because an authorized user will have access to the credit line as if it is their own, the credit information on that card is included on the authorized user’s credit report. This can be a positive way for a young adult to build credit (i.e. joining a parent’s credit card), but it can also have a negative impact if the card holder is not a responsible credit card user. Be aware of the potential impact when considering this feature.
9. Be mindful of closing old cards. A major influence for credit reporting is the length of time your account has been open. The longer your credit history, the bigger the benefit to your credit score (due to perceived reliability). If you are thinking about closing one of your credit cards, it is important to consider the credit history associated with that card. Cancelling the card will erase your history and could negatively impact your credit score. Remember, the credit bureaus do not distinguish between you cancelling a card vs. a credit card company dropping you.
10. Use the consumer protection built into credit cards. One of the biggest perks of using a credit card to make purchases is the consumer protection built in. Unlike a cash or debit card purchase, the credit card company can dispute a charge on your behalf and often even extends product warranties beyond what is offered by the manufacturer (i.e. electronic devices or tools). Inquire with your credit card company what specific benefits they offer for consumer protection and consider using your credit card for major equipment purchases.
When credit and credit rewards programs are managed responsibly, you can benefit greatly from the value they provide. Exercise these habits and you will be beating them at their own game!