Knowing how to properly manage a credit card is the difference between ending up in a cycle of crippling debt or receiving cash back in the form of $100 or more every few months.
These are the guidelines needed to properly manage a credit card:
• Only open credit cards you plan to keep open for multiple years - The average age of a credit account affects your credit score. The older the average age of your accounts, the better for your credit score. Opening a ton of new credit cards is NOT a good idea. Every time you apply for new credit it will drop your credit score by 5-10 points for about a year. While this is seemingly not a large change, applying for multiple lines of credit in a short period of time can have a more negative impact on your overall credit score.
The key takeaway: Open new credit cards sparingly.
Additionally, closing credit cards can negatively impact your credit score. When applying for new credit, lenders look at your credit score and your credit utilization ratio. Closing a credit card can increase your credit utilization ratio and decrease your credit score. Both of these are negative signs to lenders. To ensure you can get the new line of credit you need for a car loan, personal loan or mortgage, in the near future, it may be best not to close your credit card account.
The key takeaway: Don't close credit cards if you need to apply for new credit.
• ALWAYS pay off the FULL STATEMENT balance - This single act is the make or break for proper credit card management. Being able to pay off the entire statement balance every single month is the only thing that makes it possible to receive the full benefits the card has to offer. Doing anything else will negatively impact your credit score and it will cost you interest on the borrowed funds.
There are two things that make this process easy to manage:
- Auto Debit
- Budgeting
• Auto-Debit is a MUST - The moment you get approved for your new card, take the couple of minutes needed to set-up auto debit. When setting up auto debit, be sure to set it up for the FULL statement balance. Auto debit will prevent you from incurring the outrageous interest rates tacked onto the rollover balance. Setting up auto debit also ensures that you will not miss payment due dates, therefore avoiding any late fees and it increases both your credibility to creditors and your credit score.
• Building a budget / Monitoring how much you spend - Building a budget is easy, but following one can be difficult. Budgeting is meant to make it easy to keep track of your expenses so that you DO NOT spend more than you make.
The whole point of having the credit card is for the perks. There are only three things you need to do ensure you're receiving all the perks.
- Limit the credit cards you open to only the necessary ones.
- Remain diligent in setting up auto debit for the full statement balance.
- Don't overspend. Create a budget and monitor your spending.
If your credit card is not properly managed, it can be very dangerous to your financial health. If you cannot, or will not, monitor how much you spend, steer clear of any credit cards until you are willing to do the basic steps needed receive the benefits from having one.
Assuming a credit card is the right choice for you, these are the best ways to maximize your perks:
For all of your everyday purchases, stop using cash and your debit card, only use your credit card. It only makes sense that you should only use your credit card to buy everything within your budget as it gives you cash back. If you receive unlimited 1.5% cash back, then every time you spend on your card you save 1.5%.
In some cases, credit cards have increased cash back rewards for certain spending habits like 5% cash back on specified spending categories, such as restaurants, retail stores, etc. It is good to know this, but it shouldn't be a reason for you to go out to eat on a night when you planned to save money by eating at home. Always choose to stay within your budget over spending more on your card as a means to get cash back.