Credit card is a tool, much like a hammer or any other equipment. And yet, this useful financial instrument is anathema to many borrowers, especially young adults, according to www.time.com.
Nearly 70 per cent of millennials, for instance, prefer debit to credit, according to a recent survey by Chime. A blind refusal to adopt credit, however, can hurt your long-term wealth.
When used correctly, credit cards can dramatically help your financial life. A great score, for instance, means you’ll pay less when it comes to borrowing money for a house or a car.
Misused tools, though, cause damage, and credit cards are no different. If you’re not careful, you can sink into debt and hurt your ability to borrow money cheaply in the future. A bad stretch of credit behaviour can plague your pocketbook for years.
To make the most of your credit cards, and avoid dismissing them out of fear, here are 14 dos and don’ts, according to www.time.com.
Don’t just pick any card
Your first step is to figure out what you want your credit card to do for you. Cash back? Miles? Maybe you want to finance a large purchase or afford yourself extra time to pay off a pre-existing debt without accruing interest.
Do check your credit history
Unsurprisingly, credit cards with premier terms and rewards are targeted to those with the best credit. That’s why it’s important to have a sense of how a prospective issuer will view your qualifications. An appropriate sense of your creditworthiness will help when you apply. First time borrowers should go after cards designed to build up their credit histories.
Do use the right card at the right place and time
You need a certain amount of constant vigilance to take advantage of rewards card. For instance, some banks want you to spend N400,000 within 90 days to earn the sign-up bonus. If you have to extend your budget to reach that number, then the card isn’t right for you.
Don’t carry a balance
A credit card is an unsecured loan. If you don’t pay off your card every month, you have to pay interest on the amount you owe. The average household credit card debt is nearly N500,000. Which means ballooning card debt is a problem that is likely to affect you at one point in your life, no matter what you earn.
Missing your due date only leads to trouble. It’s better to pay part of your bill on time and carry a balance, than skip the payment entirely. That way, you avoid a late payment fee. Do what you have to do to stay current, whether that means setting up automatic payments, a Google Calendar alert or paste yellow sticky notes all over your office.
Do pick your credit card due dates
If you still have trouble remembering, you can always pick a payment date that sticks in your head. Generally speaking, you can change your due date simply by going to your issuer’s website. Ask for redress if you do miss a payment. Inevitably, you’ll err. You’re only human. Some cards give you a little latitude in their terms and conditions.
Another avenue is to simply ask your issuer for a reprieve should you happen to miss a payment. Almost 90 per cent of credit cardholders who asked their issuer to lift a late fee were successful, and nearly 80 per cent were able to lower their APR through a simple request.
Do take advantage of balance transfers if you’re in debt
Credit card debt affects everyone. Financing costs on credit card debts are onerous. To alleviate pressure on your wallet, consider signing up for a card that offers excellent balance transfer terms. (This is when you move your debt from an old credit card onto a new one). Some banks allow you to transfer your old debt without a fee if you do so within 60 days of opening the card. You’ll then have 15 months to pay off that debt interest free.
Don’t spend too much of your available balance
To keep your credit score as buoyant as possible, don’t spend more than 20 per cent to 30 per cent of your available credit limit. Issuers don’t look kindly on borrowers who max out their cards each month, even if they pay them off in full. One trick is to only use your credit card for recurring payments, such as cell phone bills and streaming services, if you think you may overspend. Track your utilisation ratio on your card’s website.
Don’t pay foreign transaction fees
Travelling abroad is expensive. Don’t make matters worse. Many cards will charge you a foreign transaction fee of about three per cent of what you buy overseas. If you’re planning to travel soon, look to a travel card, even if you don’t want to play the rewards game.
Don’t automatically reject annual fees
You may scoff at paying nearly high amount a year simply for the privilege of owning a credit card. But you shouldn’t necessarily dismiss the idea altogether.
Do use a credit card instead of a debit card
Your credit card and debit card may look similar if you hold them side-by-side, but the payment processing infrastructure and your issuer treat them very differently.
A stolen credit card is much preferred to a stolen debit card. Not only are you potentially liable for more fraudulent purchases with your debit card, but your credit card will generally be refunded much quicker, since your bank is dealing with credit as opposed to cash.
Don’t close old credit cards
Fifteen per cent of your credit score is determined by the length of your credit history, which involves the age of your credit accounts. All things being equal, a longer credit history helps you improve your score. Moreover, a closed card means you’re lowering your available credit limit. Even if you keep your spending the same, you risk increasing your credit utilisation ratio. Keep the card open, and use it every so often to keep the card active.
Do know your side benefits
While a debit card is essentially just a substitute for cash, a credit card bestows perks even beyond rewards.
For instance, many issuers will provide your credit score from one of the credit agencies every month for free, and the major contributing factors to your score. You can use the monthly scorecard to make sure nothing is afoot with your credit report. If you do notice a sudden drop, then you can peruse your report to find the error. Your credit card can also get you price protection on large purchases, extended warranties and free checked baggage on airlines.
Do redeem your rewards
Even if you pick the right card, use 20 per cent of your available credit, pay off your balance every month, you still have to actually use your rewards once you’ve earned them. A recent NerdWallet study found that about one in five cardholders don’t.