When it comes to credit cards, maintaining excellent credit isn’t always a walk in the park. However, if professionally managed, credit cards can be powerful tools for building a good credit history, earning rewards, and facilitating financial emergencies. Here’s a hands-on guide listing down the cardinal Do’s and Don’ts to help you out.
The Do’s
Prompt Repayment of Balances
Always repay your balance before the due date. Making on-time payments not only saves you from incurring late fees but also positively impacts your credit score. Regular repayments indicate your financial discipline and reliability to creditors, ranking you favourably.
Regular Review of Your Statements
Keeping tabs on your credit card statement is critical for two main reasons. First, you can effortlessly identify any charges that you did not approve, providing an early warning for potential fraud. Second, it helps you understand how you are spending and where you can make budgeting adjustments.
Maintaining Low Credit Utilization
A low credit utilization ratio (CUR)—the portion of your credit limit you’re using impacts your credit score positively. It’s recommended to keep your CUR below 30%. For example, if your credit limit is $1000, try to keep your balance below $300.
Use Your Credit Card Benefits
Many credit cards come with hidden benefits like travel insurance, cashback, merchandise discounts, and more. Make sure you are well-informed about such perks and use them to your advantage.
The Don’ts
Don’t Make Minimum Payments Only
While it’s tempting to make only the minimum payment on your credit card, it’s not a good practice. This can lead to a snowball effect of growing debt due to high interest rates. Aim to clear the full outstanding amount or, at the very least, a substantial part of it every month.
Avoid Maxing Out Your Credit Card
Avoid using all your available credit as it may negatively affect your credit score. As stated earlier, it’s wise to maintain a low credit utilization rate.
Don’t Apply for Multiple Credit Cards at Once
Multiple applications within a short period can negatively influence your credit score. It leads creditors to perceive you as a higher risk, hence worsening your creditworthiness.
Avoid Costly Cash Advances
Cash advances on your credit card come with hefty fees and high-interest rates and should only be used as a last resort in a financial emergency.
Conclusion
In conclusion, using a credit card comes with responsibilities. Your behavior towards credit cards directly influences your future financial prospects like loan acceptance, insurance premium amount, etc. Follow the do’s and avoid the don’ts to ensure you maintain a healthy financial life.
FAQs
1. What happens if I miss a credit card payment?
Missing a credit card payment can result in late fees and a possible increase in your interest rate. It may also negatively impact your credit score, particularly if you are consistently late with your payments.
2. Can I overuse credit card benefits?
No, credit card benefits like reward points, cash back, etc., are designed to be used. However, it’s wise not to overspend to earn rewards, as this can lead to debt.
3. Is it bad to apply for multiple credit cards?
Yes, each time you apply for a credit card, a hard inquiry is made on your credit report that temporarily lowers your credit score. Multiple applications within a short span depict you as a risky borrower.
4. Can I consistently use my credit card to its limit?
Most experts counsel against frequently reaching your cards limit as it can result in a high credit utilization ratio detrimental to your credit score.
5. Is it better to cancel an unused credit card or leave it open?
It can be better to leave an unused credit card open since closing it may affect your credit utilization ratio and average account age negatively, both crucial for your credit score.
