Proper Use of Credit Cards

What is the proper use of a credit card?

Following are some tips to help make sure you don't fall victim to credit card abuse.

Charge only what you can reasonably pay off in a few months

Don't allow your credit card balance to grow out of control. If you must use your card for a big-ticket item, make sure you will have the resources to pay off this purchase within a few months. By keeping your balance in check, you will save on interest and finance charges and reduce the risk of getting into financial trouble.

Keep track of how much you're charging each month

If you regularly pull out your plastic to pay for dry cleaning, buy the newspaper, pick up lunch, and pay for groceries, you probably don't realize how much of your paycheck is going toward incidental charges you could pay for in cash. You may be surprised when your statement shows a large balance composed mainly of nickel and dime charges. Keep track of your purchases and avoid paying interest on purchases you could have made just as easily with pocket change.

Would you buy it if you had to pay cash?

Using a credit card is convenient--sometimes too convenient. Before you make any unplanned purchase, ask yourself whether you would still buy the item if you had to pull cash out of your wallet instead of plastic. Often, the thrill of "buy now, pay later" makes us more likely to buy things we don't really need.

Pay the highest interest rate card first

If you carry more than one credit card, your cards probably have different interest rates. If you're carrying a balance on all your cards, you should generally make the greatest effort to pay off the card with the highest interest rate. If the balance on the higher rate card is large enough, it may even make sense to use a card with a lower interest rate to make payments on the higher interest card. Once the high-interest card is paid off, you should close the account so that it is removed from your credit record.

Pay more than the minimum payment on your account

If you ever want to see a "zero" balance on your statement, you must make more than the minimum payment each month on your credit card bills. Card companies have gradually lowered the size of the minimum payment to about 2 percent of your balance. They aren't doing you any favors by asking you for less money each month. Instead, it can take years to pay off your balance, even if you never add to your original debt. By increasing your monthly payment even a little, you can eliminate debt more quickly and save yourself a lot of interest. And if you're being charged varying interest rates on different portions (e.g., balance transfers or cash advances) of your total balance, any payment amount you make beyond the minimum payment due will be applied toward the portion of the total balance with the highest interest rate.

If you have extra money, pay off your card balance

Use any windfall cash to pay off your outstanding balance. Unless you're sure that the after-tax return on your potential investment will be more than the interest rate on your credit card, you'll be further ahead by paying off your credit card debt than by investing the unexpected cash. Stocks may go up or down, but interest payments on credit cards grow and grow.

Refuse the offer to skip a month's payment

Credit card companies sometimes offer to let you take a month's vacation from their bill. Often these offers come during the holiday season, as a way to encourage you to spend the "extra" dollars on additional gifts. You're not really getting something for nothing, though. The card company continues to charge interest on your balance, which will not be reduced by your regular monthly payment and may even increase if you use the card during this no-payment month.

Keep a credit limit high enough for emergencies but avoid impulse buying

If your muffler falls off in Tennessee and your bank is in Boston, the mechanic may not be willing to accept an out-of-state check to repair your exhaust system. However, your credit card would be happily accepted--if your credit limit is high enough to cover the cost of the repairs. It is important to keep a credit limit high enough to cover unexpected expenses, but don't be tempted into using this available credit for impulse purchases.

Use a travel card only if you can pay the balance in full monthly

If you're going to carry a travel card, you must understand how it works. You might think a travel card is more prestigious than a standard credit card, but travel cards often demand a high annual fee, and payment in full is due at the end of the month. If you pay only a portion of your balance, the travel company may give you a month or two to catch up. But if you still haven't paid in full at the end of this time, they'll cancel your card, and this action will likely appear on your credit report.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2015


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