Some individuals are pretty much terrified of credit cards, often considered the black sheep of the credit sector. One perspective of credit cards is its association with imagery of people swimming and struggling up to their neck in a pool of debt, fighting to keep their head above water. On the other end of the spectrum, high-rollers flashing their black cards with no spending limits often serve as the envy of many. Most people probably consider a black credit card the ultimate symbol of financial power.
The only inaccuracy in the scenarios above is the blame or kudos we designate to credit cards. The cards do not directly contribute to their holder’s indebtedness or wealth; they are merely tools. The cardholder’s behaviors, attitudes, and responsibility drive their financial state of affairs and not the credit card itself.
What is a Credit Card?
We all have a general concept of what a credit card is. It’s a form of payment made of plastic having a number, 16 or more digits in length, expiration date, and a pin code. You can swipe or scan it at points of sale, store it on your devices or enter it on websites to pay for goods and services. There is a fundamental difference between a credit card and a debit card even though they share all the features and functionalities listed above. Credit cards facilitate you borrowing money from the card issuer directly but usually with a limit. You spend your own money already deposited in your bank account when using a debit card.
Both tools provide convenience and ease of use, but it is easier to fall into debt with a credit card versus a debit card. With a debit card, your only debt exposure is short-term. It happens when you opt-in for overdraft protection with your bank. Financial advisors discourage signing up for it because the convenience of overdraft protection comes with high fees.
Credit cards have become almost indispensable to the current financial system. In addition to the previously mentioned convenience, they provide value, rewards, and other essential benefits. To get the most out of holding credit cards, you must be responsible. Let’s explore nine ways you can be responsible with your credit card.
1. Read and Understand the Credit Card’s Terms and Conditions
I can’t stress enough the importance of reading and understanding the credit card customer agreement. Most times, they have already started to impact you even before you make your first purchase; checking the account opening disclosures shares equal significance. You need to know your due dates, interest rates, fees, and other details like what to do if you want to cancel the card. If you cut up the card and throw it away, the annual fees would still be applicable and could lead to you incurring penalties if left unpaid.
2. Don’t Miss Payment Deadlines
When you miss your payment deadlines, your credit card company can charge you late fees and increase your interest payments. Paying them on time helps develop your credit history, used to calculate your credit score.
Missing payments reduces your credit score. Setting up payment reminders or automatic payments helps prevent you from missing payments.
3. Avoid Interest Payments By Paying Your Bill In Full Every Cycle
Incurring charges you cannot afford to pay off in full; leads to you paying interest on the unpaid balance. Never pay just the minimum because interest on your balance adds up over time. Paying the minimum or carrying a balance increases the difficulty of paying off credit card debt. If you have a big purchase to make, it’s better to take out a low-interest loan or save over time for the purchase.
4. Never Make Cash Withdrawals
With cash withdrawals, credit card issuers usually charge interest daily. The interest on cash withdrawn is calculated from the withdrawal date and at a higher interest rate than the Annual Percentage Rate (APR). Charges of up to 4% could apply depending on your credit card company.
5. Don’t Use Your Credit Card for Emergencies
Your budgeting and financial planning need to include an emergency fund. Emergencies like medical conditions or job losses, as regrettable as they are, will happen. Emergencies are expensive, but if you use your credit card to cover major emergency expenses, you are taking on a high-interest loan. High-interest loans often lead to bankruptcy.
If you had the money to pay out of pocket, you probably would not have changed the costs to your credit card. So, chances are you will retain a significant balance meaning expensive interest payments over time. Insurance, emergency accounts, and indemnity planning present better options to prepare for emergencies.
6. Stay Well Below Your Credit Limit
Your credit utilization ratio tracks how much of your available credit you use. A low credit utilization ratio usually generates a better credit score for you. Only use the credit you need and stay well below your credit limit.
7. Fight Fraud by Monitoring Your Statements
Checking your credit card statements is considered a best practice since it also helps you closely monitor your spending. You minimize fraud by quickly spotting and immediately reporting unknown transactions to your credit card issuer. Quick action on your part reduces the likelihood of unauthorized spending logged under your name.
Ensure you utilize all available security features offered by your credit card company including, purchase notification alerts.
8. Immediately Report Breaches Including Missing Credit Cards
If you believe someone has accessed your credit card number or your card is missing, lost, or stolen, report it to your credit card company. You may have an option to deactivate the card on your end but still report it. Your card issuer will; deactivate your old card if you weren’t able to do it and issue you a different credit card number.
When reporting your breach, use the opportunity to double-check recent account activity, identifying those you did not make. The $0 fraud liability that card issuers offer protects you from paying for unauthorized charges if your card gets lost, stolen, or used without your consent.
9. Regularly Check Your Credit Information
Keeping a close watch on your credit details informs you of your current situation. It’s another safeguard helping you to identify errors. Credit checks protect you from potential fraud that could negatively affect your credit rating. It can also help you to change behaviors that keep your credit score from going up.
The Consumer Financial Protection Bureau recommends checking your credit reports a minimum of once per year. Nationally recognized credit expert, president of The Ulzheimer Group, and founder of CreditExpertWitness.com, John Ulzheimer suggests a different approach. He recommends a monthly check which also happens to be my preference.
An easy way to access your credit details includes getting a free copy of your credit report. The three major credit bureaus, Equifax®, Experian®, and TransUnion, have a mandate to provide free copies each week. Explore AnnualCreditReport.com to see how to do it.
Your credit details form a critical part of your financial success. Holding a credit card and maintaining responsible best practices set you up for success by preventing you from falling into debt or bankruptcy. You will also generate excellent credit data by paying your bills on time, not maintaining a balance, and staying well below your credit limit.
If you take good care of your credit, your credit will take good care of you. Acting responsibly with your credit card allows you to maintain a high credit score making it easier and cheaper to acquire loans to fund significant debt like a mortgage or an auto loan. Plan and make wise, responsible decisions. Your future self will thank you for it.