Credit Card Do’s and Don’ts
30 smart tips for using credit cards so you can avoid problems with debt.
Whether you’re a college student just starting out with credit or you’re new to the country and the U.S. credit system, it’s crucial to know how to use credit cards correctly. The more you know, the less likely you are to run into debt problems that can lower your credit score.
With that in mind, Consolidated Credit has put together a comprehensive list of credit card do’s and don’ts. Following these tips can make you credit savvy. If you already have debt and need to pay it off, we also have a page that explains the do’s and don’ts of credit card debt relief.
15 Credit Card Do’s
#1: Know your payment due dates
Paying on time is the single most important thing you can do if you use credit cards. Juggling multiple due dates can be tricky as you open more accounts. It’s important to note that you may be able to change the due date by calling customer service. This can help you spread payments out throughout the month so everything doesn’t come due at the same time.
Also think about setting up either auto pay or bill payment reminders through your financial institutions. This can help you avoid late or missed payments. You usually set up auto pay through your credit card account. This automatically deducts the money needed to cover your bill. If you prefer to have more control over your payments, you can set up bill pay through your bank or credit union. Then set bill payment reminders so you don’t miss the due date.
#2: Check your statements every month
Even if you set up auto pay and use paperless billing, don’t just ignore your credit card statements. You should review your statements every month to look for:
- Transactions you don’t recognize, which could be a sign of fraud
- Statement inserts that tell you about important changes to your account, such as changes to your interest rate
- Estimated interest charges on your current balance
#3: Always try to pay more than the minimum payment
Minimum payment schedules are not designed to pay off debt efficiently. In fact, the idea is to keep you in debt as long as possible to maximize the credit issuer’s profits. But there’s nothing holding you to the minimum payment schedule.
Always try to pay more than the minimum required payment on your monthly statement. Paying off your debt faster minimizes interest charges. It essentially costs you less to use credit.
#4: Know when you need to pay to use credit cards interest-free
If you start and end a billing cycle with no balance, any charges you make are interest-free. This means that if you pay off balances in-full every month you don’t pay any interest charges. It’s the most cost-effective way to use credit.
Some credit cards offer a “grace period” that extends the time limit for paying without interest charges. It’s usually about 15-20 days after the payment due date. If you pay off the balance of the previous billing cycle before
#5: Call your creditors to negotiate lower APR
Unlike fixed-rate loans, APR on credit cards can change. Most credit cards have variable interest rates. That means the rates change when the Federal Reserve increases or decrease the prime rate. Fixed-rate credit cards do exist, but they are rare.
The good thing about variable credit card APR is that it can work in your favor. You can call your creditors to negotiate lower APR. You should do this regularly, particularly if your credit score has improved since you opened the account. Simply call to speak with the customer service department and tell them you want to negotiate a lower interest rate.
#6: Only get credit cards when you have a strategic need for them
Credit cards can be a useful tool when used correctly. But that means you should only open a new account when you have a strategic use for it. For example, if you travel frequently, you may need a travel rewards credit card. You may have a specific card for gas or groceries, because an account offers rewards for certain purchases.
#7: Keep your accounts open and in good standing
“Credit age” is one factor used to calculate your credit score. It depends on how long you’ve had accounts open in good standing; that means you are current with your payments. The more old accounts you have, the more it increases your credit score.
If you open an account, then take steps to keep it open and make all your payments on time. If your need for the account goes away, see if you can find another use for it.
#8: Use your lowest APR credit card for big purchases
If you make a big purchase that will take a few billing cycles to pay off, don’t put it on a rewards credit card! It only takes about 1-2 billing cycles for interest charges to offset any rewards you earn. So, big-ticket purchases that take time to repay should always go on the card with the lowest APR. That way, you reduce the cost of paying them back.
#9: Keep your payments around 10% of your income
In general, credit card payments should take up no more than 10% of your take-home income. If you have extra cash on hand to pay more, that’s fine. But if the minimum payments on all your cards add up to more than 10% of the income you bring in, you’re charging too much.
If you hit this threshold, stop charging, balance your budget and seek debt relief.
#10: Use credit card reward programs to your advantage
Reward programs are one of the best advantages you get from using credit cards. Cash back, free gas, airline miles, and point reward programs are just some of the perks you can earn. And once you get used to using credit, strategically using rewards can help you save money.
Say, for instance, you have a card that offers 3% cash back on groceries. You can use the card to make all grocery purchases throughout the month. Then you use the income you would have spent on groceries to pay the bill in-full. You earn 3% and use your credit card interest-free. This is the type of strategy that uses credit in the most effective way.
#11: Take advantage of extras, like credit score tracking
Many credit cards offer extra features outside of reward programs. This can include fraud prevention services and credit score tracking. Use these services to your advantage! For example, credit score monitoring services usually cost $20 per month or more. Getting that type of monitoring for free is a huge benefit, so use it!
#12: Understand cosigning before you get into it
This tip is especially important for college students. If you’re under 21 then you can’t get credit without a cosigner unless your emancipated and employed. But most college students don’t really understand how cosigning works.
A co-signer is responsible for the debt if you don’t pay, but they usually can’t make charges on the account. This is different from an authorized user or a co-applicant on the account. An authorized user can use the account to make charges, but they aren’t responsible for the debt. Co-applicants mean both people can use the account and both people are responsible for the debt.
If your parents cosign so you can get an account, don’t abuse it! If you don’t make the payments and it goes to collections, they’ll get the calls, too.
#13: Eliminate credit card debt before you apply for loans
Credit card debt can easily mess up loan approvals. When you apply for a loan, the underwriter checks your debt-to-income (DTI) ratio. It allows them to make sure you can afford the debt before they give you the loan. It measures total monthly debt payments versus your total monthly income.
In order to qualify for a loan your DTI must be below 41% with the new loan payments included. If it’s not, you get rejected. So, it’s a good idea to pay off some debt before you apply for loans. This can also help improve your credit score, so it’s easier to qualify.
#14: Become familiar with debt consolidation before you need it
Debt consolidation takes multiple debts of the same type and rolls them into one low-interest monthly payment. Credit card debt consolidation can be extremely useful if you have multiple balances that you need to pay off. Consolidating at the right time helps you avoid debt problems that can lead to financial hardship and bankruptcy.
The trouble is that most people don’t know about options for consolidation before they need them. As a result, you end up scrambling to find solutions when you’re financially stressed. So, research options first to understand when to use things like balance transfers and consolidation loans to your advantage.
#15: Know when it’s time to seek professional help
One of the biggest mistakes that people make with credit cards is being stubborn about asking for help. You see your bills getting higher, but you procrastinate and avoid asking for professional assistance. The problem with this is that the longer you wait, the fewer options you may have available.
Consumer credit counseling is designed to help people facing credit card debt problems. Credit counselors are certified professionals that understand all the options available to eliminate debt quickly. Don’t be shy about calling them for help!
15 Credit Card Don’ts
#1: Don’t run up your balances to the limit
This is extremely bad for your credit and your ability to manage debt. Credit utilization is the second most important factor used in credit scoring. It measures how much credit you have in use versus your total available credit limit. If you want to maintain a good score, you should never utilize more than 30% of the credit you have available. Less is always better. But maxing out your credit cards is bad and should be avoided.
#2: Don’t use reward credit cards when you can’t pay off the balance quickly
Everyone loves earning rewards, but sometimes we’re not smart about it. If you earn 1.5% cask back on a purchase, but you pay 20% APR for several bills cycles, you don’t actually earn anything. In fact, it ends up costing you. If you put the same purchase on a card with low APR, you pay less interest charges even if you pay it off in the same amount of time.
Reward credit cards are best used when you pay the balance off in-full every billing cycle. Don’t use a rewards credit card just to earn rewards. It’s a costly strategy that could run you into financial hardship.
#3: Never use credit as a substitute for income
This is a huge mistake with credit cards that will put you on a slow road to financial distress. If you use credit to cover daily expenses because you don’t have funds, you’re only covering up the problem. And, in reality, you’re making it worse. Credit cards are revolving debt, which means the minimum payment requirement increase with your balances.
As you charge daily expenses, your credit card bills increase, leaving less cash flow. That means you’ll need to make more charges to cover next month’s expenses. It’s a downward spiral that usually ends up in bankruptcy court.
If you see this happening, stop charging and make a budget. If you can’t find a way to balance your budget, talk to a credit counselor.
#4: Don’t miss a payment by more than 30 days
Really, you should always make every effort to pay your bill on time to avoid late fees. However, if all else fails, make sure to pay before your next bill is due. If you don’t pay within 30 days of the due date, you technically miss the payment. This results in the credit issuer reporting the missed payment to the credit bureaus. Missed payments appear on your credit report and stay there for seven years.
Credit history is the single biggest factor used to calculate your credit score. Missed payments have a significant negative impact on your credit score. Once you miss a payment, you have 6 months before the creditor moves the account to charge-off status and closes it.
#5: Avoid cash advances
A cash advance is where you use your credit card at an ATM to withdraw money. This is not like a debit card ATM withdrawal where you only need to worry about fees. Credit card cash advances mean you’re borrowing against your available credit line. Not only do you pay fees, you also pay special cash advance APR on the charge. This rate is much higher than the purchase APR you pay on regular transactions. This is an expensive way to get cash and it’s best avoided.
#6: Don’t apply for too many new credit cards in a 6-month period
Each time you apply for a credit card, you authorize a credit check that creates a hard inquiry on your credit report. These stay on your report for two years, but they count towards your credit score for six months. If you authorize too many credit checks in a 6-month period it hurts your credit score.
So, don’t apply for too many credit cards or loans at once. This will also help you get accustomed to managing new debt before you take on another account.
#7: Never open an account just because you received an offer
Credit card offers are endless, even when your credit score isn’t the best. When you have good credit, the offers pour in. But just because you receive an offer in the mail, it doesn’t mean you need to open an account.
If you receive a credit card offer that piques your interest, go online to research the card. You can also compare it to other similar cards to make sure you get the best deal. Make sure you need the card and can afford to add in the bill. Then, and only then, should you open a new account.
#8: Don’t close old accounts
People sometimes believe that you should close old accounts that you don’t use any more. However, this can actually hurt your credit score. “Credit age” is not the biggest factor used in scoring, but it does count. So, closing your old accounts decreases your credit age and may also decrease your score.
If you have an old account that’s always been in good standing, find a use for it, even if it’s a small use. If the APR is high, then call to negotiate a better rate.
#9: Don’t let accounts close to due inactivity
This follows off the point above. Old accounts in good standing are good for your credit. But if you don’t use a credit card, the creditor may close it for you. They’ll usually notify you before it happens. But ideally you want to avoid that potential entirely.
It’s important to note that a closed account in good standing drops off your credit report after about 10 years. So, the decrease in your score may not happen immediately. But it could come at a time where you want your score to be as high as possible. So, it’s best to keep your accounts open to avoid this type of senseless damage.
#10: Don’t ignore fraud protection calls
Many credit cards offer built in fraud protection. If your account gets flagged for suspicious activity, you will receive a phone call. Many of these calls are automated, so you hear a recording instead of a live person. However, don’t hang up! It only takes a few minutes to verify your purchases. It will list purchases and you simply confirm that you made them. If you don’t recognize a transaction, they’ll deactivate your account so no additional charges can be made.
Using a fraud protection service correctly could help ensure you’re not out any money. Credit card fraud has a liability limit of $50. But if you respond promptly to fraud verifications, you might be off the hook completely.
#11: Don’t carry balances from month to month
Some people think that it’s bad for your credit score to pay off your balances in-full. They believe you need to carry balances over from month to month to maintain good credit. This is a myth.
Credit utilization is better when it’s lower. A net utilization ratio of 0% is the best ratio you can maintain. This effectively means you don’t carry any debt over. Anything higher than 30% is bad for your credit, but you don’t get penalized for going lower than 30%. So, pay off balances quickly and try to keep them at zero to maximize your score and avoid debt problems.
#12: Never take on more credit than you can afford to pay back
Sometimes people treat credit as a way to make ends meet when they don’t have enough income. But if you can’t afford your bills now, you won’t be able to afford another bill for debt repayment.
Always make sure you can afford debt payments before you take on new credit. As far as loans go, lenders will help you ensure you can afford the payments by checking your debt -to-income ratio. However, you don’t have the same safeguard with a credit card. You can get a new card and run up thousands of dollars in debt. But that could put you in a situation where you can’t afford your bills.
If you’re going to make a big charge or series of charges, you should check to see how much it will increase your bills.
#13: Don’t hide from your creditors if you’re having trouble
You shouldn’t treat your creditors like they’re debt collectors. People hide from collectors to avoid harassment and demands for payment. So, if you fall behind on your credit card payments, you may be inclined to do the same to your creditors. Don’t!
Credit issuers generally want to help when you run into trouble. They don’t want your account to be charged-off or discharged for less than the full amount you owe. They also want to keep you as a loyal, active customer. So, they’re usually willing to help you work things out.
If you can’t afford to pay your bills and creditors start to call, pick up the phone and ask them to help you find a solution. They may offer forbearance, where they suspend your payments until you can catch up. Interest rate negotiation may also be an option, and they may set up a payment plan to help, too.
#14: Don’t assume a certain debt solution will fix your problem
Every financial situation is different and there are a variety of debt solutions available. Which one you need depends on your debt, credit and budget. So, you can’t just assume that a solution that worked for a family member or friend will work for you. You need to find the best debt solution to work in your situation.
Of course, knowing which solution that is can be tough if you’ve never faced debt problems before. Most people hear anything about debt solutions until they need them. So, it can be a steep learning curve as you scramble to find a solution. If you hear about a solution that worked for someone else, research it thoroughly and talk to a professional to make sure it will work for you, too.
#15: Don’t settle debt if you don’t want to ruin your credit
Debt settlement companies pay a lot of money to advertise services that “the creditors don’t want you to know about.” These commercials often make it seem like they have a secret, quick-fix solution that can have you out of debt today. But they aren’t exactly up front about the effects of debt settlement and the process you go through to settle. Here are some facts you need to consider:
- Each debt you settle damages your credit. You create a negative item in your credit report that sticks around for seven years.
- Settlement is not an instantaneous process. You must set aside money every month to generate your settlement offers. This can take up to 48 months and you still must make monthly payments in that time.
Settlement can be a viable option in some situations. For example, if most of your debts are already in collections and you aren’t worried about credit damage, you may choose to settle. However, don’t use this solution if you’re trying to maintain your credit score!