HOW TO USE YOUR CREDIT CARD RESPONSIBLYNov 19th, 2020
A credit card is a way to borrow money, but it is easy to forget that you need to pay that money back! A credit card does not increase the amount of money you have available. In fact, it will most likely decrease the amount of money you have available if you don’t pay your full balance off each month. This is because you will accrue interest on the borrowed money, usually at a higher interest rate than other types of loans. Your credit card payment spending should be included in your household budget to make sure you are paying it off as soon as possible. If you don’t keep an eye on your credit card spending, you will end up building up debt, paying interest on that debt, and eventually hurting your credit score due to your credit utilization and potentially missed payments if the amount becomes too much of a burden for you to handle.
Pay off your balance every month
The balance of a credit card is the amount you have spent but have not paid off. If you have a $500 credit card and have spent $300 on it, and have not made any payments toward that amount, your balance will be $300. It is important to pay it off before the due date because that is when the interest starts adding to the balance, and in turn, increasing the amount you owe each month until it is paid. If you are unable to pay off the full balance monthly, this means that everything you have purchased with the card costs more than the original price because it now has interest added to that price, often times at 20% or higher annually. What this means is if you have a $1000 balance in January and only make the minimum payment for the duration of that year, that original $1000 is now over $1200 after a year of interest. To make things worse, you are not just paying the interest on the original $1000, you are now paying interest on the interest! If we don’t pay any of that loan for another year, after two full years of having a $1000 balance, the true amount owing will exceed $1440 ($200 interest for the first year, then $240 interest on the second year due to being charged interest on the interest. This interest is based on an annual percentage rate (APR) but is calculated monthly.)
Paying your full balance off each month will not only save you a significant amount of money in interest, but it also shows lenders that you are in control of your finances and are a responsible borrower.
Make the minimum payment (at least!)
Sometimes it is just not possible to pay your balance off in full, but it is extremely important that you make at least the minimum payment dictated by the credit card provider. Missing the minimum payment will result in some or all of the following:
- Interest rate increase
- Lower credit score
- Loss of any promotional rates offered
- Cancellation of the account
- Credit card insurance cancellation
Check your statements
It is very important to check your credit card statement to make sure there are no errors. Someone might have entered the wrong number into the machine when you were paying, maybe you were charged twice, or maybe you did not purchase something on your statement. In the event you do discover an error, report it immediately by contacting your lender or card provider.
Do not share personal information
Your card number, PIN (Personal Identification Number), CVV (Card security code on the back of the card) and your password for online transactions are all meant for just you to know. Anyone else possessing this information leads to the risk of theft. If you share your PIN or security code, you may be held responsible for transactions you see as unauthorized.
Warning signs that you are overspending
If any of the situations below apply to you, these are indicators that you may be living beyond your financial means:
- Credit card balance keeps growing month over month
- You have reached the credit limit
- You are unable to pay off your balance in full each month
- You are not making payments
- You are only able to make the minimum payment
- You take out cash advances (These are usually subject to a higher interest rate than a standard purchase)
If you find yourself in any of the situations above, you can do the following:
- Stop using your credit card entirely
- Avoid applying for new credit
- Look at how you can cut spending
- If you must use credit, try other less expensive options (Credit cards will almost always be among the highest interest option for borrowing money.)
Consider other credit options
There are other ways to borrow money that cost less interest. If you are having trouble paying down your debt you can look at a personal line of credit, which should have a much lower interest rate than your standard credit card. There are also low-rate option credit cards where interest rates are in the low teens rather than the high teens or low 20’s for interest rate percent. Credit cards that offer rewards are great, but only if you are not carrying a balance. A low-rate option card will not have rewards, but the money you will save in interest if you are carrying a balance will save you much more then you will earn from rewards. A good rule of thumb is if you keep a balance, try to switch to a low-rate card. If you can pay the balance off in full each month, then you’re not paying interest, meaning you can take advantage of the rewards card.