16 Rules For Smart Credit Card Use

Credit cards can be useful tools for protecting yourself from fraud, racking up rewards and establishing credit. However, they can also be dangerous if you don’t use them responsibly, potentially starting a viscous debt spiral. Following is some advice from Betsy Megas on how to wisely use credit cards, originally published on Quora and is licensed under CC BY 4.0

1. Sign up for credit card(s) selectively

They’d be happy to sign you up for all kinds of things, because they make money. You are the consumer of the credit card, and you should be aware of how they make money, and how you use credit cards. There are various comparison sites online. Pay attention to fees, particularly recurring ones. If you expect/intend to carry a balance, the interest rate will also be important. Otherwise, look for a no-fee credit card with good rewards or rebates.

2. Open credit cards sparingly, and aim to keep them a long time

In my adult life, I have had more library cards than credit cards. I don’t open cards willy-nilly or just to get the bonus or the store rebate. (I might make an exception for a home improvement store, if ever I take on a major home-improvement project.) At the moment, I have two credit cards, with big enough names to be widely accepted. (Edit to add: While minimalism is the approach I favor, others have done pretty well opening various accounts for travel bonuses, rewards, store discounts, or to take advantage of introductory offers. If one of these approaches benefits you and you are confident in your ability to read and apply the fine print for your purposes, more power to you.)

The part about keeping them a long time has to do with the way credit reporting works. One of the factors in determining your credit score (FICO score) is the longevity of your oldest account.

 

3. Share your credit card account(s) only with those you trust very much

Most contracts say you’re both on the hook for debts. Also be aware that some “affiliate” accounts may not result in the secondary card holder building credit. Read your contract or ask customer service to explain if you’d like to share but you’re not sure how it works.

4. Record your credit card numbers and contact information in a safe place

I use a password safe to generate and store unique passwords for different sites and accounts. It has a secure notes function, where I record the number and the codes. I also record contact information such as the customer service phone number, so I can easily contact them if the card is lost.

5. Pay off your balance in full, on time, each month

A credit card is an expensive way to borrow money. If you carry a balance (i.e. do not pay the full amount by the due date), you may pay 18% interest or more, and that can add up fast. This may require spending within your means and keeping track.

6. Pay off your balance immediately after a larger purchase

This isn’t strictly required, and it doesn’t directly cost you money to wait until you are billed and the bill is due. Your credit score will get a little boost from not having a large balance on your account when it is reported.

7. Pay at least your minimum, and ideally more

Your minimum payment is large enough to pay down the debt eventually, but it’s small enough that you’ll take forever and pay much, much more in interest. If you’re trying to get out from under a credit card debt, do whatever you can to pay more than this amount each month.

8. Be careful of spending too much money

Avoid spending money you don’t have, and also avoid spending more than you would if you were paying in cash. Credit cards tend to make spending money so easy it does not feel like spending money, or does not feel like spending as much money. (Hint: there are various apps which can help with keeping track.)

9. Use your credit card as consumer protection

Most credit cards will side with the consumer if there is a problem. If you got a bad product or service, and the merchant is not giving you a refund, the credit card company may be able to withhold payment, which gives you additional clout if you’re trying to get a problem resolved. Do try working with the merchant first. Many would rather have the opportunity to correct the problem or refund your money voluntarily.

Some credit cards also include things like insurance for traveling or car rental, and extended warranties. Read your card agreement or contact customer service to find out what yours offers.

10. Review your monthly statement

It’s good practice to see where your money is going. It’s also important to make sure you recognize all the transactions there. If you find something you are reasonably certain you didn’t do, or you find that something was charged more than once, report or dispute the bad transactions immediately. Credit card companies should work with you to correct errors or cancel and reissue a card that’s been stolen.

11. Understand the difference between a debit and a credit card

These days, many banks give you a card with credit card logo on it. It’s a debit card if it is linked to your checking or other bank account. Spending on a debit card feels like spending on a credit card, but works a lot more like writing a check. The money has to be in your account, and it’s removed immediately, or soon after the transaction. Spending on a true credit card results in a bill at the end of the month (or monthly billing cycle), which you then have a certain amount of time to pay before it begins accruing interest.

12. Inform them in advance of traveling, especially overseas

Many credit card companies have fraud-detection algorithms watching for unusual account activity. One of the surest ways to trigger such systems is for your card suddenly to turn up in Morocco-or-somewhere. If you’re not in Morocco when your card gets used there, a fraud alert is exactly what you want to happen. If you really are there when they call your home phone number about it, you’re unlikely to get the message. Put it on your packing list to contact your credit card company before you leave home, and spare yourself the headache.

13. Get yourself off credit offer mailing lists by visiting OptOutPrescreen.com

You can always find credit offers online, at your bank, etc., so there’s no reason to open up the security concern of having credit offers sitting in your mailbox all day while you’re out.

14. Get an annual credit report

In the U.S., you’re entitled to one free credit report per year. Get it, and look through it for errors. If you find anything wrong, correct it. These days, assorted free services also watch your credit activity and send you monthly updates along with estimated credit scores.

15. Consider placing a credit freeze on your account

If you do apply for credit, you’ll pay a modest fee to lift the freeze temporarily. The rest of the time, it will keep people from applying for credit in your name. (This is what most identity theft guard services do for you, but there is no reason you can’t do it for yourself.)

16. Understand how credit cards make money

There are multiple ways. They charge a transaction cost to the merchant, typically in the 2% range. You still pay $10 for a $10 item, but the merchant pays $0.20 [1] to the credit card company. There may also be a transaction minimum or per-transaction fee, which is why you’ll sometimes see a “minimum credit card purchase” sign in stores. You generally don’t see this fee as a customer because most merchant agreements forbid merchants from charging extra to credit card users.

Credit cards also make money on interest, if you carry a balance, and fines and fees if you are late with a payment. With a little foresight and planning, you should be able to avoid paying such fees.

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- While I do strive to only write accurate information and dispense valuable advice, I am not a licensed financial adviser. All information is based solely on my personal experience and personal research and should be treated as such. Find out more.