Credit cards can be a pretty controversial topic in the money world. Are they a good thing to have? Should you avoid them all together? What credit card rules should you be following? It’s all so confusing!
Famous radio host and money guy Dave Ramsey believes that credits cards are evil for 99.9% of situations and should never be used, this is the only topic I don’t agree with Ramsey on. I believe that if you know how to use them correctly and for your benefit, credit cards can help you in a ton of ways. You can build up a credit history, earn free rewards, and so much more! It’s not a hard science, but it can work if you know how to work it.
11 Credit Card Rules You Should Be Following
Don’t Apply For Too Many Cards
There are two major problems with having too many credit cards.
The first is that applying for too many credit cards can really hurt your credit score. When you apply for a credit card there is a hard inquiry put onto your credit report which will lower it a few points. Applying for a ton of cards really quickly is going to decrease the number of cards you’ll actually be accepted for because your score decreases every time. This is only a problem early on because eventually your score will go back up and it won’t affect you long term.
The second problem is that having too many credit cards can get really complicated. If you have a wallet filled with credit cards you’re increasing your chances of forgetting to pay one of them! I suggest that you have 1-3 credit cards, depending on your situation, but nothing more than that.
- Related: 17 Things Frugal People Never Do
Make Sure You Get a Rewards Card
Every credit card company/bank offers some kind of reward card that you can get. You can earn cash back, money for groceries, free movies, or travel credits. Sounds good, right?
A credit card without a rewards program is just a waste of a credit card. If you’re using credit responsibly and not getting any kind of reward from it you may as well just use cash. Personally, I have two credit cards, the first one is a cash back card where I get cash at the end of the year and the second is a Scene VISA and it gives me points to get free movies!
Avoid Cards With an Annual Fee
Credit cards that have higher rewards usually come with an annual fee as well as the regular interest rate. This can be anywhere from $5 to a couple hundred dollars a year. This is money that you just don’t need to be spending.
There are a ton of good rewards cards that have no annual fee that you can grab and you’ll come out just fine. Use that extra money and invest it or something that will really make you money.
- Related: How to Quit Overspending For Good
Keep Your Limit Low
The first credit card I ever got had a credit limit of $1,000 and I didn’t increase it for over four years because I never had to. I’ve recently started to want to travel and will need a credit card to be able to charge plane tickets and hotel rooms. Even now, my limit is only $2,500 and I don’t want it to be higher.
There is a serious trap that you can fall into when you increase your credit limit, it tricks your brain into thinking you have more money when you don’t. The more money you spend on your credit cards, the more interest you’ll pay. Don’t fall into the trap and try and keep the credit limits as low as you can for your situation.
Only Use Them When You DON’T Need To
Being ready for emergencies is a really smart thing if you want to be financially stable.
If your only plan for emergencies is to use a credit card to pay for them, you should probably be planning ahead better. When you use credit cards for things you don’t actually have the money for right now, you’re going to end up in a really bad spot and these items will sometimes end up costing double what you paid for them. If it isn’t an absolute 100% emergency, chances are the thing you’re charging isn’t a necessity and you don’t really need it.
Only Buy What You Can Afford Today
One thing you need to realize if you’re going to change your finances is if you can’t pay cash, you can’t really afford it.
If you don’t have the money in your account right now to pay for whatever you’re about to charge on your credit card, wait. You don’t have the money, so you can’t actually afford it. Don’t get stuck in the thought pattern that you’ll have the money to pay for it next month and you’ll pay it off then.
If you throw something on a credit card you’ll end up paying way more than it’s actually worth.
Don’t Carry a High Balance
Carrying a high balance month to month is going to create so much unnecessary interest in the long run. You’ll end up paying hundreds of dollars a year in interest which is just money you’re paying so banks can get richer and you can stay poorer. Also, carrying a high balance on your card is going to hurt your credit score because of your credit utilization (learn more about how credit scores work here).
Pay Way Over The Minimums
If you’re only paying the minimum payment each month on a credit card you’ll be paying it off for decades. Your minimum payments are typically calculated as interest payment + $10. This means you’re only paying $10 towards your actual debt and you’re just giving the bank free money in the form of interest.
If you want to be smart with a credit card you need to be paying way more than the monthly minimums and keep the balance lower.
Know Your Interest Rates
Do you have cards that are all at different interest rates? If so, it’s always smart to know and understand them. If you need to charge a big purchase to a credit card for whatever reason, you want to make sure you charge it to the lowest interest rate card every time. Seriously, don’t make an exception on this one.
Knowing your interest rates will also help you to understand which cards you should pay off first. If you have one card with a 20% interest rate and another with a 12% interest rate, you should obviously pay down the 20% card first because it’s going to cost you more money in the long run.
Track Your Spending
Knowing where your money is going is a key to being smart with credit cards. People often fall into the trap of charging little items here and there and acting like it’s no big deal. If you charge a $2 coffee to your credit card every day for a month, that’s $60 that you didn’t have in your budget. Once again, if you can’t afford to pay cash than you can’t really afford it.
Having a full understanding of where your money is going will help you to understand how you can and should use your credit cards. A good thing to do is to make sure you have mobile banking on your phones/computers so you can easily track what you’re charging and where.
- Related: Zero-Based Budgeting for Beginners
Know and Understand Your Credit Score
Credit cards and credit scores go hand in hand and it’s super important to understand your credit score to know how to use credit cards. Luckily, we wrote a really great post on credit scores and you can check it out here.
Credit cards can really be beneficially for you if you use them correctly! They can open a lot of doors and let you travel the world. If you have any other credit card rules you think my readers should know about, leave them in the comments below! If you enjoyed this post be sure to share it on Pinterest for your friends to see!
Hey! My name is Taylor O’Halloran and I’m a huge fan of saving money any way I can.I’m obsessed with dogs and I love all kinds of cheese even though my stomach hates it. I’m a recent university graduate who just wanted to do her own thing and see what happens! Follow me on the journey!