Credit cards can be an effective financial tool to build or rebuild credit histories, but misuse could prove disastrous.
An improper use of your credit card could include exceeding its credit limit or missing payments, which could incur extra fees and damage your score.
1. Don’t go over your limit
Every credit card comes with its own spending limit that should be strictly adhered to in order to avoid incurring unnecessary fees and interest charges as well as harming your credit score. Exceeding that limit can have serious repercussions for both you and your wallet!
While it might be tempting to use credit cards for payments like utilities or gas, doing so could end up costing more in the long run thanks to high interest rates and late fees. A better approach would be setting up automatic monthly payments through your bank account for the minimum due.
Accidentally exceeding one’s credit limit can happen often; whether due to losing their debit card and needing emergency credit to purchase necessities while waiting for replacement cards or unplanned expenses such as car repair and medical costs. But don’t despair — as long as payments are made promptly it should be relatively straightforward to return below your limit!
2. Don’t get a cash advance
Credit card cash advances work much like loans from your line of credit; they’re generally more costly than other transactions and generally start accruing interest immediately. Furthermore, cash advances factor into your credit utilization ratio which influences 30% of your score – therefore if taking out one is something you are contemplating it is essential that you read up on its impact by speaking to both a representative and reading up on its terms first before making your decision.
Creditors may interpret frequent cash advances as an indicator of financial instability, which could impede your ability to obtain future credit card debt and loan approval or competitive loan rates. Furthermore, higher balances can lower your credit score, making it more difficult to qualify for jobs, apartment rentals and certain forms of insurance coverage.
3. Don’t make purchases you can’t afford
Credit cards provide rewards, buyer protections and many other advantages, but they’re not without risks. Chief among them: spending more than you can pay back each month may lead to interest charges which increase the total debt amount owed.
As opposed to loans, where lenders ensure that you can afford debt payments by verifying your income and credit utilisation score, when charging items on your card you are ultimately responsible for repaying. It is therefore crucial that only use credit for purchases you can easily repay each month in order to avoid incurring debt which could cause financial issues later on – for many this means forgoing unnecessary items altogether or paying with cash or alternative methods instead.
4. Don’t miss a payment
Careful use of credit cards can help build your credit and save you money, but misusing one could cost you big time – from incurring late fees and carrying a balance, to damaging your score altogether.
Schulz advises implementing an efficient system to keep track of payments and avoid missing them altogether, such as signing up for alerts directly from card issuers; downloading apps that notify when statements or payments are available; setting calendar reminders – among others.
If you find yourself missing payments, contact your card issuer immediately and explain your situation. Many card issuers are willing to work with their customers when issues aren’t their responsibility; most will work closely with you if that’s the case.
5. Don’t use your credit card as a budgeting tool
Use of credit cards responsibly can improve your credit score and provide advantages such as rewards and 0% interest for limited times – as well as easier approval for mortgages, auto loans and personal loans. But without timely payments on balances due, balances may quickly become out of hand and threaten financial security.
Responsible credit card usage can help build credit and avoid falling into the debt trap, and the best way to do this is by monitoring your monthly statement closely. Many card issuers provide easy-to-use online portals for tracking spending habits as well as end-of-year summaries to give an overall view of spending habits. You could also create a budget and switch over to cash or debit payment when trying to be more mindful about spending habits.
