Credit cards can be useful tools to help even out your monthly cash flow, and give you the reassuring feeling of having access to credit for a rainy day. But these kinds of financial health benefits only work if you prudently manage your credit use.
Here are some basic guidelines on how to do that:
- Pay your credit card balance on time
- Pay as much of your credit card balance as you can afford each month
- Use your credit card statement as a monthly financial health check
- Build your credit score
- Create (and stick to) your budget
- Take advantage of rewards programs
- When to finance a big purchase with your credit card
- When to transfer your credit card balance
- When to use your credit card for emergency payments
Pay your credit card balance on time
On-time payments are crucial to building a positive credit history, and missing payments can tarnish your credit score for years. Be certain that you understand your due dates so that you don't add late fees to your balance. You might also consider putting your minimum payments on autopay. While paying the minimum monthly payment might not help you chip away at your debt, it will at least ensure that you're payment history is consistent.
Pay as much of your credit card balance as you can afford each month
The optimal budget goal is to pay off your entire credit card balance every month, especially if you're opening your first credit card account. In doing so, you'll avoid paying interest on your card.
If you can't pay your balance off in full, do your best to pay more than the minimum monthly payment. That will help to reduce the interest accruing against your balance each month.
Use your credit card statement as a monthly financial health check
Regularly reviewing your statement allows you to better understand your monthly expenses while also protecting against fraud or errors that might damage your credit.
When you get your statement, check to make sure that you recognize all of your charges, and while you're at it, take stock of how you're using your credit. If meeting minimum payments every month is becoming a struggle, you might want to consider limiting your credit card usage in the next month to help you get back on track. But if you're easily paying your balance in full, then you can request an increase to your credit limit, which may improve your credit score.
Build your credit score
Here are a few tips to build your credit score:
- Pay your bills on time: Successful payments are recorded in your credit report and contribute up to 35 percent of your credit score.
- Keep an eye on your credit utilization rate: Credit utilization rate, one of the biggest factors impacting your credit score, is calculated by taking the credit and loan balances you currently owe and dividing them by the total limits of your credit lines. The optimal credit utilization rate is less than 30 percent. For example, if you have one credit card with a limit of $1000 and you currently owe $250, your credit utilization rate is 250/1000 (25 percent). Two ways to keep your credit utilization ratio low are by keeping credit card balances low and extending your credit limits. Use both tactics when you are confident that you can manage your credit spending and payments carefully.
- Keep your credit card open: Even if you pay off the entire balance of your card, keeping a card open can extend the age of your credit card and of your credit history. The age of your credit, in turn, provides 10 percent of your credit score. But check the card's terms and continue to monitor your monthly statements, just to be sure that there are no penalties attached to keeping a zero balance on a card.
Create a budget
Some financial advisors will tell you to avoid using your credit card for things you need like rent, groceries, or utilities, while others will encourage you to add those items to your balance so you can cash in on a credit card's reward program.
Regardless of which way you go, the key to healthy credit card behavior is evaluating precisely what you can afford to charge to your credit card each month, and not exceeding that amount. The best way to make that evaluation is to track your expenses through a budget.
There are a number of money management tools that can automate budgeting, including the Chase Budget Builder. Search for money management tools to find one that meets your needs and use the tools to establish a consistent approach to your spending.
Take advantage of rewards programs
Credit cards with reward programs allow you to earn cash back or redeem reward points for discounts or gift cards. Some programs include bonuses for specific types of spending (such as groceries or gas), and you can redeem your points for things like discounts on travel and retail stores.
If you feel you are comfortably meeting your monthly credit card payments, and are able to put more charges on your credit card, you can take advantage of reward programs by moving some of your regular monthly expenses to your credit card. If you do this, try to make your monthly credit card payments at least the amount of those monthly expenses, so that you don't get lulled into a false sense of financial security and start living beyond your means.
When to finance a big purchase with your credit card
Before you walk into a store to make a big purchase, make sure you know your card's credit limit and its APR (Annual Percentage Rate). Knowing these things can help you determine whether using your card is your best financing option.
When to transfer your credit card balance
If you're having difficulty meeting the minimum payments for your credit card because of additional interest and fees, it may help to transfer your balance to a card that offers a 0 percent APR for an introductory period. Having this interest rate-free period can be a great incentive to build a plan to pay off your debt in a set period of time.
You can do that by working into your budget a monthly payment to the balance transfer card that's big enough to pay off the entire transferred balance before the 0 percent introductory period ends.
When to use your credit card for emergency payments
When emergencies arise, credit cards can be useful for paying for vital services. But before you add to your credit card debt, consider negotiating your bills to build financing options that are better than using your credit card.