A credit card can be a valuable tool for paying for daily expenses, earning rewards and building a credit history. But those goals are only achievable if you use them responsibly.
To reduce the risk of debt and damage to your credit score, consider these best practices for using credit cards that will help you use yours to its full advantage.
Always pay your credit card on time and in full
Want to know the golden rule of credit card use? Pay your bill on time every month. On-time payments are one of the most important factors in determining your credit score, and you’ll also avoid costly late fees.
If you can, instead of paying only the minimum amount due each month, pay your balance in full. This may help you avoid paying interest and accruing too much debt.
Automate your payments
To help ensure you pay on time each month, consider setting up automatic payments.
To set up automatic payments, head to your card issuer’s online portal or mobile app to link your bank account to your credit card. Typically, it takes just a few clicks to input the information.
You can usually set your automated payment to your minimum payment amount, the full statement balance or another amount you choose. You can schedule the payment for right before your due date, or choose a date that’s more convenient, like right after payday, as long as it’s before your due date. This way, when life gets busy, you’ll never miss a payment by accident.
Maintain a low credit utilization ratio
Paying your credit card bill in full may help you keep a low credit utilization ratio, but what exactly is that?
Your credit utilization ratio is the total percentage of available credit you’re using at any one time. For example, if you have one credit card with a $1,000 credit limit and you’ve spent $300, you have a credit utilization of 30%. But if you have two cards, one with a $1,000 limit and another with a $500 limit, and you’re still only using $300 between both cards, your credit utilization is 20%.
Many financial experts suggest keeping your credit utilization ratio below 30%, since it’s typically one of the most important factors in determining your credit score.1 A high credit utilization ratio may signal to creditors that you’re overextended and struggling to pay off your debt.
Maximize credit card rewards
Most credit cards offer rewards for eligible purchases made with the card. This can mean getting a little cash back when you shop for groceries or earning points when you fill up the gas tank.
To make the most of credit card rewards, pick a card with a rewards rate that aligns with your normal spending habits. For instance, if you drive a lot, consider choosing a card that offers bonus rewards for gas purchases. Be sure to pay your bill in full each month, too, because any interest that accrues can offset the rewards you earn.
Redeem rewards to pay other bills or put into savings
When you’ve accumulated enough credit card rewards that you want to redeem, consider using them to benefit your budget rather than splurging on something else.
You can typically redeem points or cash back for a statement credit on your account, which could mean a lower bill for the month. If you earn cash back into a bank account, consider moving that money into a dedicated savings account that earns interest.
Don’t use a credit card for cash advances
A cash advance is when you use your credit card to withdraw money from an ATM. While it may be convenient, it’s also one of the most expensive ways to borrow money on your card.
Credit card cash advances typically begin accruing interest immediately and at a higher interest rate than your standard interest rate. On top of that, there’s usually a cash advance fee, and there may be an ATM fee as well. Your best bet: Save cash advances for emergencies only.
Track your expenses
Most credit cards have spend-tracking tools available that make it easier to add up your expenses and categorize them. This may help you recognize areas where you’re spending more than you think and cut expenses you didn’t know were eating into your budget.
Smart habits lead to financial success
When used strategically, a credit card can be one of the most important financial tools in your wallet. By paying your bill on time and in full each month, maintaining a low credit utilization ratio and using your rewards to help you lower your bill or build savings, you can set yourself up for success now and in the future.
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