The average amount that consumers owe on their credit cards is climbing again, but just because so many people are relying on their credit cards more doesn't mean there aren't savvy ways to keep monthly payments from busting budgets. Three of our top Motley Fool contributors share with you what they believe are the can't-miss habits every person with a credit card should cultivate.
Dan Dzombak: The best possible credit card habit is to pay your entire credit card bill each month. By doing this, you avoid all finance charges, late fees, and interest charges that quickly spiral out of control. It's important to understand how credit card interest works; even people who consider themselves financially literate are frequently surprised by how quickly the interest racks up.
This is because credit cards start charging you interest on the date of purchase. If you pay off your credit card bill in full on the due date, then the credit card company waves that interest. Many people have the mistaken belief that interest only starts building on the first day you miss payments, but this is incorrect.
If you don't pay off your credit card bill in full, then interest is charged to you from the date you purchased the item until the date you pay off your credit card bill. To illustrate this, let's look at an example.
Let's say you buy a kitchen set on the 1st of the month for $2,000. Your credit card charges 20% interest and the bill is due on the 31st. If you miss paying the bill until the 1st, instead of paying a late fee and one day's worth of interest (so, $1 plus a $25 late fee), you will actually owe the late fee and interest for the month. A $25 late fee plus $34 in accrued interest is $59. This interest is compounding daily, so at higher levels, the amounts can quickly spiral out of control -- particularly if you are also missing payments.
Dan Caplinger: As Dan Dzombak notes, paying off your credit card bill in full every month can keep you from ever having to pay finance charges. But a lot of people run into problems that keep them from zeroing out their cards each month. For them, the smart alternative is another great habit: constantly using your leverage as a good card customer to get deals that can reduce or eliminate interest and finance charges -- even if you do carry a balance.
Many card companies will offer 0% promotional rates for a year or more, giving you the ability to carry a balance and make minimum monthly payments without the burden of finance charges. Occasionally, you can even get such offers in conjunction with balance transfers, allowing you to take balances from other cards and move them to a new card. By finding such offers in succession, you can often go for years without paying interest, giving yourself plenty of time to put yourself in a position to get your card paid off in full. Moreover, by keeping current with your payments, you'll build up exactly the positive credit history that will keep those lucrative offers coming in the future.
In today's competitive credit card industry, just threatening to take your business elsewhere can be enough to get cheap financing offers coming in. Recognizing your value as a customer is a great way to take advantage of your good credit.
Matt Frankel: There is no wrong or right answer to how many credit cards you should have. Some people find that one is sufficient, and I know some people who have 20 or more credit cards and maintain a near-perfect credit score. However, the consensus seems to be that about five to seven is a good number.
One big reason for this is because it allows you to maximize your rewards. Different credit cards offer different types and rates of rewards. And if you pay your balance in full each month, it should cost you nothing except maybe an annual fee (depending on your cards). Many cards don't have an annual fee, and those that do may be well worth it to you depending on your situation.
For example, my Delta American Express Platinum gives me double the miles on Delta purchases, so I always use it to book my travel. The card has a pretty steep $195 annual fee, but it gives me free checked bags when I fly, saving me $50 every trip.
My Best Buy Reward Zone MasterCard gives me 6% back on Best Buy purchases, so it's to my advantage to use it for electronics. Plus, the card has no annual fee. These are just a few examples, but depending on your frequent purchases, it is well worth it to make a habit out of maximizing credit card rewards.