It may seem like an unusual analogy, but I think of credit cards the same way I think of chainsaws: They can be an incredibly powerful tool if used correctly, but if you're not careful, you can do some serious damage.
On the one hand, credit cards can help you build your credit history and offer up rewards for your spending. On the other, it’s all too easy to ring up a balance you can’t afford to pay off at the end of the month. If opening up your credit card statements is starting to make you sweat, here are some practical tips to help you use your cards more responsibly.
1. Dig deeper into your spending habits.
First things first: If your credit card spending is starting to feel out of control, what’s the cause? Was it a one-time unexpected emergency purchase? Or was it a result of more frequent overspending? The first step if you haven’t put together a budget is to see how much you can actually spend without getting into a danger zone. Our One-Number Strategy can help you get started.
2. Stick with one card.
If you use multiple credit cards for your purchases it might be hard to keep track of how much you’re really spending. Consider sticking with your one “good” credit card — and by that I mean a card that provides you with some decent rewards. Personally, I like cash back cards with no annual fee that give you at least 1% cash back, because those rewards are “free” money as long as you pay off your balance every month. Or if you travel a lot, then perhaps you prefer an airline or travel rewards card.
Just make sure that you don’t close your other accounts. Your credit score is partially determined by the length of your credit history (the longer the better) and also the percentage of your total available credit you’re actually using, known as your credit utilization ratio (the smaller the better). So if you, say, have a card without a balance but a $10,000 credit limit that was established five years ago, it helps your credit score to keep this card active.
If you have a card that you want to put on ice that charges you an annual fee, call the issuer to see if they’ll change it to a no-fee card in exchange for fewer rewards, because you won’t be using it. If they won’t do that, see if they’re willing to transfer your available credit line to another card you already have with the issuer.
3. Keep regular tabs on your APR and other fees.
Generally, your goal should be not to carry over a balance on your credit card. But when you do, it’s important to know what annual percentage rate you’re being charged, whether that’s set to change — and if you’ll be charged a penalty rate for missed payments, which could be nearly 30%. (Nevermind those late fees.) These types of charges are found in the details of your credit card agreement.
On the plus side, reading the fine print is also a good way to figure out what benefits you may have on your card that you never knew about. For instance, you may find your card provides a collision damage waiver for rental cars, or price protection for your purchases.
4. Set a reminder to make your payments on time — or early.
A whopping 35% of your credit score is determined by your payment history — that is, whether you pay your bills on time. If you’re having a hard time remembering your payment deadlines, set a calendar reminder. You could also opt to pay your card on a weekly basis. More frequent payments means fewer charges to review and, if your spending does get off track, it will be easier to course correct the following week.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.