Q: I’d love to improve my credit score, but I can’t get ahead of my monthly payments. I also find that my spending gets out of control when I’m paying with plastic. How do I use my credit cards responsibly?
A: Using your credit cards responsibly is a great way to boost your credit score and your financial wellness. Unfortunately, though, credit card issuers make it challenging to stay ahead of monthly payments and easy to fall into debt with credit card purchases. No worries, though; Mutual Credit Union is here to help!
Here’s all you need to know about responsible credit card usage.
Refresh your credit card knowledge
Understanding the way a credit card works can help the cardholder use it responsibly.
A credit card is a revolving line of credit allowing the cardholder to make charges at any time, up to a specific limit. Each time the cardholder swipes their card, the credit card issuer is lending them the money so they can make the purchase. Unlike a loan, though, the credit card account has no fixed term. Instead, the cardholder will need to make payments toward the balance each month until the balance is paid off in full. At the end of each billing cycle, the cardholder can choose to make just the minimum required payment, pay off the balance in full or make a payment of any size that falls between these two amounts.
Credit cards tend to have high interest rates relative to other kinds of loans. The most recent data shows the average industry rate on new credit cards is 13.15% APR (annual percentage rate) and the average credit union rate on new credit cards is 11.54% APR.
Pay bills in full, on time
The best way to keep a score high is to pay credit card bills in full each month — and on time. This has multiple benefits:
- Build credit — Using credit responsibly builds up your credit history, which makes it easier and more affordable to secure a loan in the future.
- Skip the interest — Paying credit card bills in full and on time each month lets the cardholder avoid the card’s interest charges completely.
- Stay out of debt — Paying bills in full each month helps prevent the consumer from falling into the cycle of endless minimum payments, high interest accruals and a whirlpool of debt.
- Avoid late fees — Late fees and other penalties for missed payments can get expensive quickly. Avoid them by paying bills on time each month.
- Enjoy rewards — Healthy credit card habits are often generously rewarded through the credit card issuer with airline miles, reward points and other fun benefits.
Tip: Using a credit card primarily for purchases you can already afford makes it easier to pay off the entire bill each month.
Brush up on billing
There are several important terms to be familiar with for staying on top of credit card billing.
A credit card billing cycle is the period of time between subsequent credit card billings. It can vary from 20 to 45 days, depending on the credit card issuer. Within that timeframe, purchases, credits and any fees or finance charges will be added to and subtracted from the cardholder’s account.
When the billing cycle ends, the cardholder will be billed for the remaining balance, which will be reflected in their credit card statement. The current dates and span of a credit card’s billing cycle should be clearly visible on the bill.
Tip: 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.
Tip: To ensure a payment is never overdue, it’s best to schedule a time for making your credit card payments each month, ideally 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.
Credit cards can easily turn into spending traps if the cardholder is not careful. 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.
Using credit cards responsibly can help you build and maintain an excellent credit score, which will make it easier to secure affordable long-term loans in the future.
Your Turn: How do you use your credit cards responsibly while keeping your score high? Share your best tips with us in the comments.