If your credit card's annual interest rate is 18%, that doesn't mean you will be charged 18% interest each year. Depending on how you manage your account, your actual interest rate may be higher or lower. It could even be 0%. This is because interest is calculated on a daily basis, not on an annual basis, and interest is only charged if you have a monthly debt.
Credit cards can be an awesome financial tool, but, if used incorrectly, they also become one heck of a trap. If you have bad credit, then you probably have a love/hate relationship with credit cards. You love spending money on them, but you hate having to pay your bill.And while maxing out your credit cards is a great way to tank your credit score, using your cards responsibly can also be a great way to help it!
Here are three credit card tips you should follow in order to use your credit cards responsibly.
1. Don’t carry a balance
But carry a balance month to month? That’s when things start to get dicey.
Some will say that you should carry balances on your credit cards so that it has a positive effect on your credit score. This is not a smart financial move as you will continue to pay interest on the balance you carry month to month.
While it’s good to wait a few days to allow a purchase to show up on your statement, maintaining a revolving balance from one month to the next costs you more in interest charges and actually damages your credibility.
Your credit utilization ratio—the amount of debt you possess compared to your total line of credit—determines a considerable portion of your credit score. To have a revolving balance means that you’re using up more of your available credit, which creditors look at unfavorably.
2. Choose your rewards carefully
The only problem is that worrying too much about your points can lead to you spending too much! It’s a tricky balance to maintain. When shopping for rewards, you’ve got to make sure you’re careful.
When it comes to exploiting points or rewards through your card, Lavelle cautions that you must “make sure that you again do the math.
Buying travel by using your credit card to gain points is not the most cost effective way to purchase travel, especially if you can’t pay the balance each month. Really the only way to make this a “deal” is to use the credit card to get the points, pay the card off each month to avoid interest, and then be able to redeem the points for travel without needing to add cash to the award.
3. Don’t get greedy!
A credit credit used properly can be a great asset. A credit card used poorly can be like an anchor, dragging your credit score down into the watery depths. And the best way to use a credit card properly is make sure you know your limits.
Don’t fall into the trap. Carry one credit card and consider carrying only a card with a low limit so that you will not be tempted to make unwise purchase decisions. Using a card for day-to-day spending is becoming more and more common as cash is almost being phased out. It is easy to spend beyond your ability when paying with a credit card, so you may want to only carry a card that has a modest limit so this doesn’t become a problem. As with cash, a credit card with a low limit makes it easy to know when you are done. The money is gone.
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A recent report showed that college students have an average of more than four credit cards with a total balance of more than $3,000. Some students have credit card debts of up to $7,000. Graduating with so many credit card debts will hinder you from entering the real world, especially if you missed a payment or default.