All About That Credit is a 4-part series about establishing, improving and maintaining good credit. Credit is a complex topic, and while I hope this series will be informative, I welcome questions specific to your particular situation.
Part 1: Respecting your Credit Card
I’ll be honest – I love my credit card, and here’s why:
- It generates points that I actually use and provides cost savings benefits on purchases that are relevant to me.
- It helps protect me from criminals (more than once!).
- It has been instrumental in helping me establish a low cost line of credit which allows me to make financial decisions with more flexibility.
It might be just a piece of plastic, but a credit card can have amazing benefits, and also serious consequences. No matter where you land on the credit spectrum, from opening your first credit card to sweating about how to pay this month’s minimum, you can create healthy credit card habits today with these four tips:
- Know what you can afford. Your first credit card will typically have a reasonably low credit limit. But that doesn’t mean you should spend all $300 if you can only afford $100. Credit card companies issue credit in with the intent of making profit, they don’t have your financial interest in mind.
- Pay on time. Set up automatic payments each month so you don’t forget. Even if only the minimum is paid (not recommended, see #3), it’s better than no payments. Late payments will reflect negatively on your credit score.
- Pay in full. This will protect you in the future. As you are building more credit, your limit will increase and you will make bigger purchases. The potential danger here is making one large purchase, then making another, and another, until soon enough the monthly credit card bill will too high to pay off – not only that first month, but the next month, and the next month, and so it goes.
- Keep balances low. For recurring expenses that you usually pay via your checking account, such as a cable or phone bill, consider using your credit card and paying it off at the end of the month. This can help improve your credit score becauase you are consistent about using your line of credit, as well as paying it fully and on time. And let’s not forget the added benefit of generating extra points on cards with point based benefits.
Bonus tip for high credit card debt: Stop using your card and create a debt reduction plan. If your debt is spread over several cards, or if you have a card for which you just can’t make a dent, (hint: you are only paying the minimums and/or spending more than you can afford) give your cards a break and make a plan:
- For starters, take an inventory of the balance and the interest rate for each account.
- Next, figure how much discretionary (take-home pay minus fixed expenses) income you can put toward payments.
- Finally, pay down the credit card with the highest interest rate first, while paying the minimum balances on the other cards. When that account is paid off, move to the card with the next highest interest rate.
Next up: Part 2 – Understanding Installment Accounts
Have questions about credit? Submit your question here!