I would be remiss if I didn’t touch upon the subject of credit cards.
Credit cards, when used wisely can be another tool in your financial toolbox.
But you first need to understand fully all of the card’s terms and conditions; stay on top of payments, preferably by paying in full each month; and realizing the real cost of purchases made with credit when you don’t pay the full amount owed each month.
Using a credit card is like taking out a loan and so if you fail to pay the loan in full, you’ll start paying interest on that loan.
Credit cards do offer many useful features for those who can use them wisely.
Here’s what you need to know about credit cards:
1. Choose Wisely
Before just signing up for any old credit card, you need to understand your financial lifestyle – your money needs and wants. Once you understand that piece of the puzzle, and you determine how you’ll use a credit card, you’ll want to understand all the card’s features including:
Annual Percentage Rates (APRs) and whether rates are fixed or variable
- Annual, late and over-limit fees
- Credit limit on account
- Grace periods before interest begins accruing
- Rewards including airline miles or cash back
2. Understand the True Cost of Credit
Figure out the total price of any item you purchase based on the interest you’ll pay. Make sure you understand the personalities for any missed payments and whenever possible, make the largest payment possible if you can’t pay in full.
3. If You Must Use Credit Follow the 20-10 Rule
I don’t advocate using credit cards, and I certainly don’t advocate carrying a balance on a credit card. If you do intend to use them the 20-10 “rule of thumb” will help you understand how much you can afford to borrow. Credit cards are loans, so avoid borrowing more than 20 percent of your annual net income on all loans (not including your mortgage). Payments should not exceed 10 percent of your net monthly income.
Again, I don’t advocate the use of credit cards nor do I think it’s wise to carry a balance.
4. You Do Get Some Protections
Card holders are entitled to certain protections:
- Zero liability means you are not responsible for fraudulent charges when you report
them promptly. Report as soon as you become aware of a fraudulent charge.
- In some cases, you have the right to dispute purchases with merchants for unsatisfactory
products or services.
5. Know Your Credit Score
Credit scores change over time. These scores are the numerical value used by lenders to assess your credit risk at any given time. It changes based on the history of payments, amounts you owe if you obtain any new credit among other things. Credit scores range from 300 to 850. The higher the score, the better.
Credit scores are important because they influence whether you’ll be approved for credit cards, mortgages and other loans, as well as the interest rates you’re offered. Some of the best ways to keep your scores high are to:
- Pay all of your bills on time each month
- Make more than the minimum payment on any credit
- Avoid opening needless revolving credit accounts
- Fill out credit applications only when necessary
- Avoid keeping credit cards at or near the maximum spending limit
There are three major credit reporting agencies. You’re entitled to a copy of your credit report annually. Visit Credit Sesame to check your score and get copies of your credit report or contact one of the three major reporting agencies below for your copy.
P.O. Box 2000
Chester, PA 19022
P.O. Box 2002
Allen, TX 75013
P.O. Box 740241
Atlanta, GA 30374
6. Check for Mistakes
Over 14 million people each year find inaccuracies on their credit reports. They include such things as incorrect late payments, accounts that should have been closed, other people’s debt information and more. Report mistakes right away as errors could lower your credit score, costing you money.
You’re the one who has to ensure your report is correct. If you find an issue:
- Check the last page of your report — instructions for claim disputes are usually on the last page.
- Contact the credit bureau and report the error immediately.
- Put it in writing — if the issue remains unresolved, provide a letter of explanation and request
that it becomes part of your report.
If you’ve struggled with debt, the last thing you should do is go out and get more of it by obtaining a credit card. Some people can never use credit cards again while others who have worked through their issues can handle using credit cards because they made a promise to themselves to pay in full when the bill comes in.
Only you know where you stand, and whether or not you can withstand the temptations that come with using credit cards.
When faced with the choice, choose wisely.