Using Credit Cards Responsibly
There’s lots of advice out there on how to use credit cards, and much of it is conflicting. To make matters more confusing, the methods credit bureaus use to calculate your credit score are not exactly transparent.
However, there some basic tips to keep in mind that will help keep you use credit to your advantage.
1. Pay off your balance every month
If you remember nothing else about credit cards, remember to pay off your balance every month. As you make purchases using your credit card, they will be added to your balance. If you don’t pay off this balance by the due date, you will be charged interest on the balance.
For example, say that after you make your payment, you have a remaining balance of $500 and your credit card charges 10% interest. You would owe $550. Next month, you would owe $605 — even if you don’t make any additional purchases. The month after that, you would owe $660.50. You can see why it’s important to stay on top of interest charges by paying your balance in full each month.
The easiest way to do this? Spend only what you can pay off each month. We’ve found it helpful to calculate a rough budget: subtract all of your monthly expenses from your take-home pay, then set a monthly credit card spending limit for yourself that is $100 or so lower than the amount left over.
2. Limit the number of cards you open
One key to success with credit cards: Keep it simple. Credit card companies offer low introductory interest rates and valuable points programs to incentivize you to open a card with them, but it’s often easier to manage just one card. Pick one and stick with it, especially when you’re just starting out.
3. Don’t close unused cards
Here’s one exception to the keep it simple rule: Don’t close your old cards. Let’s say you opened a credit card back in college. Over time, you grew your credit limit on this card to $3,000, but the card doesn’t offer the same rewards as others you now qualify for, so you don’t really use it. It’s better to keep this card open and use it for a small purchase once every couple of months rather than close it. One important factor in determining your credit score is your debt to credit ratio. You’ll want to keep this lower than 30% to avoid adversely impacting your credit score, so lowering your available credit by $3,000 may not be the best move.
4. Only use credit cards as much as you can handle
Do you struggle to spend within your means? That doesn’t mean you can’t have a credit card to build your credit, just use it differently. Rather than using your credit card for every single purchase, try using it to pay only for gas or groceries — and pay it off in full each month.
If, on the other hand, you feel confident that you can keep your credit card purchases under control, you can use it as a way to budget and simplify. By making all of your purchases with your credit card, you can see exactly how much you’re spending and avoid obsessively checking your bank account balance.
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