Credit cards can be a consumer's best friend, or the worst enemy. When using credit cards, it's important to do things the right way.
With that in mind, we asked two of our writers for a few things you should keep in mind when using your credit cards. Here's what they had to say.
Patrick Morris: Credit cards can be wonderful things. They provide enhanced consumer protection beter than debit cards, allow consumers to build credit scores, and often offer great rewards. But they can also be incredibly dangerous, and should be used with an appropriate level of caution.
One of the most important things to remember when using a credit card is that making only the minimum payment can be one of the most dangerous things any consumer can do. Consider a credit card with a $1,000 balance that has an interest rate at the national average of 13%. If the minimum payment of $35 is made each month, it would take nearly three years to pay off the balance, and the consumer would pay an additional $200 in interest over and above the $1,000 balance.
But if that rate is at 18%, the numbers jump to 38 months, and $315 in interest. At 24%, it takes an additional five months, and the interest charges more than double, to stand at nearly $500.
While everyone's circumstances and situations are different, it's important to see how quickly interest charges can add up. Always be aware that, if you make only minimum payments, the maximum amount of money may be taken out of your wallet.
Matt Frankel: Patrick is spot on, and I'd like to add that it's also very important to protect your personal information whenever possible. While you can't prevent some data breaches, like the infamous one that happened at Target, you can take steps to keep yourself safe.
First, if you have any indication your credit card information has been compromised -- a store you shopped at got breached, you see any suspicious activity on your credit card, or if you have a hunch that someone else has your credit card number -- immediately call your card issuer and request a new card with a new number. This will immediately render your card information useless to would-be thieves.
Also, use particular caution at any location where you swipe your own debit or credit card, such as gas stations or outdoor ATMs. Devices called "skimmers" are being installed over the tops of credit card readers more and more frequently, and as technology evolves, they are getting smaller and tougher to detect.
To sum it up, a very important thing to do if you use a credit or debit card is to take an active role in the security of your financial information. Using a mobile wallet or chip technology to pay for goods and services is safer than swiping a card, but you should still be on alert.
Patrick Morris: In addition to paying more than the minimum payment, I would also recommend to always be aware of your credit limit, and stay well below it. This is important for a number of reasons.
Going over your credit limit can result in a fee. In addition to the fee, there's also a possibility your interest rate could also be raised, depending on the terms of the contract. Therefore, if you maintain a balance on the card, the charges will continue to compound. So it's critical to keep track of your spending, and know whether or not you're approaching your credit limit.
Secondly, this is also important because it can actually hurt your credit score -- depending on how close you are to hitting your credit limit. For example, if you have a $1,000 limit and spend $400 every month, the bureaus see that you use 40% of your available credit. But it is recommended individuals only approach 20% of their available balances. So, in this example, if you were able to request a credit limit raise to $2,000 and continue to spend just $400 on that individual card, it can boost your credit score.
Credit limits don't gather much attention, but they're very important to keep track of.
Matt Frankel: Finally, another thing to keep in mind is that, if you use credit cards the right way, you can actually make money. This works in two ways.
First, when you charge something to your credit card, you'll have at least a month from the purchase date to pay for it. Meanwhile, your money is still in the bank or invested, and is earning interest. In other words, by paying off your credit cards in full each month, you're essentially getting an interest-free loan.
Also, the competition between credit card issuers has been heating up in recent years, and the rewards being offered are pretty impressive. For instance, the Capital One Quicksilver card has no annual fee and gives you 1.5% cash back on every purchase. And the Citi Double Cash card is even better, with an effective 2% cash back rate -- 1% when you charge, and another 1% when you pay. So, if you charge $10,000 worth of purchases in a year and pay the balance off each month, you can actually make up to $200 by using your credit card instead of cash.
The point is that if you understand the system and use it to your advantage, credit cards can actually be a very useful financial tool.
