Safe and effective credit card use is an important part of managing your finances. These five tips will help you get the most out of your cards and minimize risk:
1) Monitor The Total Amount You Pay Toward Debts Every Month
Professional financial advisers agree on a simple rule of thumb:
You shouldn’t devote more than a third of your income to paying down debt. This includes all debt sources: mortgages, car loans, credit cards, student loans, and so forth.
Keep track of your total monthly debt payments, and take action to avoid crossing that line if you can. Pay down some of your loans faster or slow your rate of credit card purchasing.
Carrying more debt than you can safely deal with jeopardizes your financial stability and may cause problems with achieving long-term goals like saving for your children or your retirement.
2) Make A Habit Of Checking Your Credit Reports
There are three credit reporting agencies (TransUnion, Equifax, and Experian) that are responsible for compiling your credit information.
Your credit score, the almighty number lenders use to make decisions about extending credit to you, is based on the agencies’ reports. Ross notes that the purpose of your score (and your credit history) is to illustrate how responsible you are with money you borrow.
“Your credit history,” Ross says, “gives lenders data to plug into a risk-to-reward ratio.”
Your credit report tracks figures including the total amount of debt you carry, what types of credit you use (i.e. credit cards, mortgages, etc.), whether or not you pay bills on time, and how many credit inquiries have been initiated by you or lenders on your behalf.
Any inaccuracies in the data the agencies hold on you could hurt your credit score. An inaccurate credit score is a problem because it could make it harder to secure good interest rates or even any access to credit at all.
This is why you need to review your credit report carefully once a year.
Each agency is obliged to provide you with a free credit report once a year; these can be ordered through AnnualCreditReport.com. To do more frequent monitoring, you can rotate through each agency separately, ordering one report every 4 months.
Note that you can also receive a free credit report if a lender denies you credit.
3) Manage Debt Wisely And Think Twice Before Closing Unused Credit Cards
The two parts of your credit report that have the biggest impact on your credit score are your payment history and the ratio between your debt and available credit.
This latter figure is also called “credit utilization.” Paying your bills on time and keeping your debt ratio low make you look like a better prospect to lenders.
The part of credit scoring that people often overlook is that your score can be impacted by actions that seem positive as well as negative actions like carrying high balances or missing payments.
If you cancel an old credit card you don’t use anymore, the result can be a reduction in your credit score. Remember that the point of tracking all your credit information is to accurately represent your credit history; the longer that history is, the better lenders feel about you.
Canceling a card can have a direct negative impact on your credit score by altering your debt ratio.
The loss of the line of credit associated with a canceled card reduces the overall amount of credit you have available. When that number goes down without any change in the amount of debt you’re currently carrying, your ratio changes in a way that does not reflect well on you in the eyes of lenders.
4) Take The Time To Read Policy Agreements
There can be a world of difference in the way different credit cards treat you.
One might lump all fees together into a single annual sum, while another might charge separate fees for all sorts of activity on your account. It is best to know in advance what you’re getting into and to open accounts only with lenders who provide rates and fee structures that are compatible with your planned usage.
If you know in advance that you’ll have to carry a balance on a card, for instance, a low interest rate is a top priority. If you’re going to pay your balance in full every month, though, a higher interest rate may be excusable, particularly if the card offers other benefits, like a rewards program.
Remember that credit cards are offered by an almost bewildering array of lenders now. It’s not just banks that offer cards; retailers, brokerage firms, and even travel agencies are in the game, too.
It doesn’t take advanced research to figure out which cards are best for you.
The policy agreement provided by the issuer will tell you everything you need to know. Points that are particularly important to look for include what can increase your interest rate, which actions incur additional fees, and how fees change when you use the card for overseas transactions.
Don’t be afraid to contact the lender directly if you still have questions.
5) Take Steps To Minimize Fraud Risk
Although many lenders extend fraud protection to cardholders, you can still avoid a lot of hassle by using common sense to protect your credit card and personal information.
Ross says that fraud prevention is most effective when both consumers and lenders work together on it.
Review your credit card statements every month to look for suspicious charges. You may also want to check your account activity online in between statements.
If your lender offers usage alerts (via email or text) you may want to sign up for them. Hang onto receipts so that you have records to compare against your statements. Notify your lender if you see any transactions that you can’t explain.
And, of course, you should contact your lender immediately if you know your card has been lost or stolen.