8 Credit Card Dos and Don'ts
DO: Understand the card rates and fees before applying.
Credit card providers are required by law to make certain information available to consumers before you apply. Look for the “Rates and Fees” section to get information on:
- APR: APR, which stands for annual percentage rate, is the yearly interest charged on a loan. Each month, you will be charged interest based on your APR and credit card balance.
- Annual Fees: Many credit cards have annual fees that are charged yearly to your credit card, usually between $50-$500. Before you apply for a credit card, check to make sure you can afford any annual fees associated with the card.
- Foreign Transaction Fees: Foreign transaction fees apply any time you make a transaction in a foreign country. If you travel frequently, you may want to look for a credit card with lower foreign transaction fees.
- Late Fees & Returned Payment Fees: If your credit card payment is late or returned because the lender was unable to process your payment, you may be charged a fee. It’s important to make payments on time to avoid being charged extra, along with other negative impacts of a late payment.
DO: Make your payments on time.
The best way to improve your credit score is to make payments on time, every time. Conversely, missing payments or making payments late is one of the fastest ways to negatively impact your score. Make sure you know when payments are due each month and how much you owe so you don’t accidentally hurt your credit score. Most credit cards offer automatic withdrawals that allow you to set an amount to be automatically paid each month, so you’ll never miss a payment.
DO: Check your statements regularly.
Each month, you’ll be mailed (or emailed, if you’ve opted for e-statements) a statement that outlines purchases made, total balance, minimum payments, and payment due dates. You should review these statements each month. This will help you keep track of your spending, identify unnecessary purchases, and prevent fraudulent transactions from going unnoticed.
DO: Pay more than the minimum amount each month.
Credit cards have a set minimum payment based on the current balance and APR on your account that must be paid each month. This amount is usually just enough to cover any interest that was accrued on your account. By making a larger contribution than your minimum required payment, you’ll be able to reduce the balance on your credit card. If possible, you should pay off the full balance every month to avoid paying more interest than necessary.
DON’T: Max out credit cards.
Be careful not to max out your credit cards. This means charging up to the limit on your credit card. Lenders use a metric called your credit utilization ratio, which is the amount of credit you're using compared to your total available credit, to help assess creditworthiness. A high credit utilization ratio can negatively impact your credit score, so aim to keep your credit utilization ratio below 30%.
DON’T: Close out old credit cards.
While it might seem tempting to close old credit cards to simplify your finances, it can actually harm your credit score. Closing an old credit card reduces your total available credit, which can increase your credit utilization ratio. Additionally, the length of your credit history is a factor in your credit score. Keeping older credit cards open can help improve the length of your credit history. Instead of closing out old credit cards, make a small purchase on that card once a month and pay it off right away to keep the line of credit active.
DON’T: Apply for multiple credit cards at once.
Applying for multiple credit cards within a short period can negatively impact your credit score. Each time you apply for a new credit card, a hard inquiry is made on your credit report. Too many hard inquiries can signal to lenders that you may be a risky borrower. If you need multiple credit cards, it's best to apply for them over a longer period.
DON’T: Take on more debt than you can repay.
One of the most important things to remember when using credit cards is to only charge what you can afford to pay off. Taking on more debt than you can handle can lead to financial stress, difficulty making payments, and damage to your credit score.
By understanding and implementing these credit card best practices, you can take control of your finances and build a strong credit history. Remember, responsible credit card use is key to achieving your financial goals.
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