Credit cards are valuable tools for many of us. They extend our purchasing power, sometimes beyond our means. One of the first forms of plastic money, credit cards eliminated the need to carry cash. How we use our cards shows our financial maturity, not just to ourselves, but also to national credit rating organizations. Here is a look at how to get the most out of our credit cards.
Credit limit and utilization
It is most advisable to avoid spending above the limit. This helps maintain one’s credit score. According to National Public Radio (NPR) the best practice is to keep our spending limited to 30%. For example, if my credit card has a spending limit of $5000, I should spend no more than $1,500 to maintain a good score. Spending below the limit indicates to credit card companies that we don’t need all their credit. This makes our credit score go up. The director of public education for Experian, a consumer credit reporting company, says that, “utilizing greater than 30% can cause scores to decrease rapidly”.
Also, never max out the credit card fee. Credit card companies charge over-limit fees. That means the interest on outstanding payments can kick the balance due over the card limit. Consequently the user must pay much more in fees.
Pay in full every month
Sometimes emergencies do arise and we need to use our full credit limit. Paying off the debt the very next month (and every month) is essential. In an NPR interview budget expert Tiffany Aliche recommends, “Pay off your credit card debt in full every month. It’s like fairy dust on your credit score”. This helps maintain a good score with the credit bureaus. The CNN tells us that a typical healthy FICO credit score ranges from 670-739. An excellent score can go as high as 800 or more. Full repayment every month also helps avoid interest accumulation.
We must avoid the temptation to pay only the minimum balance, like $15-25. It is very advisable to send the highest payment we can afford, and cut our spending in other areas. Paying merely an extra $100 over the minimum payment each month can save thousands of dollars in debt over the long term.
Pay the balance before the statement date
In case we use more than our credit limit, we can work around by paying the balance before the statement date. This is different from the payment date. Credit card users must understand the billing cycle.
Each month our credit company issues a statement with 2 dates – the closing date and the payment date. The statement date is when the credit companies notify the credit bureaus of our card usage. On the other hand, the payment date states when a particular payment is due. For example my closing date may be November 30 while the payment due date may be November 20. I have a 20-day timeframe or grace period to make a payment. The company won’t charge interest as long as I pay in full by the due date. For those of us who are unsure of our statement dates, NPR recommends that we call our credit card companies and enquire directly.
Increase the credit limit
The common notion is that increasing one’s credit limit is an opportunity to spend beyond our means. An article in Forbes in November 2020 noted things much to the contrary. It said that higher credit limits help us repair our credit, make large purchases when needed, or handle emergencies. Millions of migrants live and work in the US. Most of them send money online to their home countries as remittances. Credit cards are one of the most inefficient ways to send remittances. However, in an emergency, making an international transfer from a credit card is a valid option.
Managed wisely, larger credit limits can help improve our credit scores. For example, if I have a $3,000 credit limit and regularly end up with a monthly bill of $2,700, I’m using 90% of my limit. Increasing the credit limit would reduce the percentage of limit used (the credit utilization). Lower utilization boosts the credit score. With better credit scores we stand a better chance of being approved for loans and mortgages. Better scores can also help us get lower interest rates. Individuals with higher credit scores are offered the best available (risk-adjusted) rates.
Budget tracking tools
We can monitor our money habits only by tracking our spending. This is especially useful for those who have more than one credit card. A report published by Forbes in November noted that tracking our monthly expenses can help us make smart choices about budgeting, saving, and planning our long term finances. Some credit card issuers (but not all) offer a spending tracker.
We can use budgeting apps like Personal Finance or Mint. Mint pulls information from our credit cards and bank accounts to give an overview of our finances. We can readily view which cards currently have balance and which ones need to be paid off. We can also build our own budgets in spreadsheets like Google Sheets or Excel.
While a tracking app can help track spending, a budgeting app can help optimize it. The simple act of reviewing our credit card spending each day can enable us to cut out wasteful transactions. We can reflect on how to make better buying decisions, such as comparing prices while grocery shopping, or opting for less expensive subscription plans.
Report a missing card immediately
We must limit our exposure to credit card fraud and minimize the chance of becoming victims. A CNBC news article from December lists a step by step response to a lost or stolen credit card. Act fast. Alert the card issuer to block the card. Change the login information. Monitor your card activity. Review the credit report and dispute any fraud on it. According to the ‘Fair Credit Billing Act’ a card holder’s maximum liability for unauthorized charges is $50. CNBC reported that most major banks such as Citi and Chase offer $0 liability on unauthorized charges. However, we must notify our bank of the loss or theft quickly.
About the author:
Hemant G is a contributing writer at Sparkwebs LLC, a Digital and Content Marketing Agency. When he’s not writing, he loves to travel, scuba dive, and watch documentaries.