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How to manage a credit card wisely

How To Manage a Credit Card Wisely

Consumers can manage their credit card wisely by regularly checking their statements, making due payments on time, and by regularly paying off their total balance.
Having a credit card is about as American as apple pie. According to a 2021 study released by the American Bankers Association, over 365 million credit card accounts are open in the United States alone.1 The average American currently manages around four credit cards each. To put it another way, that’s enough to give everyone in the U.S. and Canada their own credit card! And if you have one, but don’t know how to manage a credit card wisely, you could get yourself in some financial trouble.

Credit cards are a big part of our financial lives. They are used to help us pay for monthly bills, dream vacations, and pretty much everything in between. But when we aren’t careful, credit card spending can get out of hand.

Quick Guide To Credit Card Management

CategoryKey Considerations  Tips for Effective Credit Card Management 
Credit Limit Increases– Regularly assess if a higher credit limit is beneficial. – Understand the impact on credit utilization. – Request a limit increase if it helps lower your credit utilization. – Avoid temptation to overspend. 
Interest & APR– Be aware of the interest on each card. – Understand how APR works and varies. – Aim to use credit cards with lower APR for larger purchases. – Consider transferring balances from high to low APR cards. 
Types– Different cards offer various benefits (travel, cashback, etc.). – Some cards are better for building credit. – Choose cards that align with your lifestyle and spending. – Use a secured card if building credit from scratch. 
Foreign Transaction Fees– Fees charged on transactions made abroad or in foreign currencies. – Use cards with no foreign transaction fees when traveling. – Be mindful of exchange rates and additional charges. 
Insurance – Some cards offer travel, purchase protection, or extend warranty insurance. – Review insurance benefits and use appropriate cards for purchases that need protection. 
Rewards Redemption – Rewards come in various forms: points, cashback, travel miles. – Redeem rewards in a way that maximizes their value. – Be aware of expiration dates of limitations on rewards. 
Security – Protecting against unauthorized use and theft. – Use virtual card numbers for online shopping. – Enable alerts for unusual transactions. 
Mobile App $ Online Access – Most issuers offer online and mobile access for account management. – Regularly monitor accounts via app for spending and fraud. – Use app features for budgeting and alerts. 
Customer Service – Availability and quality of issuer’s customer support. – Know how to contact customer service quickly. – Use support for disputes, fraud reports, and advice. 
Balance Alerts & Notifications – Alerts for due dates, high balances, or unusual activity. – Set up alerts to avoid missed payments and monitor spending. – Customize alerts based on your spending habits. 
Disclaimer: The information provided in this data table is for general informational purposes only and should not be considered as financial advice. Terms and benefits vary by issuer and individual circumstances. It is recommended to consult with a financial advisor or the specific issuer for personalized advice and up-to-date information.

Always Pay Your Credit Card Bill On Time

While it’s always best practice to pay off a credit card early, it’s okay if you can’t pay off your credit card balance at the end of every month. But paying your bill late—or not at all—is not okay for your credit health.

When it comes to sound financial habits, paying your bills on time is one of the most important to build. A variety of factors calculates credit scores, but payment history is the most important.

Paying your credit card on time will also help you avoid late fees and penalties. Credit card companies will add additional charges to your account when payment is late—even if the payment is just a day late. The fees are added to your total balance and will accrue interest just like any purchase. So when you pay your credit card late, you will ultimately have to pay service fees … for your service fees. If you think that sounds as unpleasant as we do, you should plan to pay your bill on time, all of the time.

To keep your credit in good standing, It is critical that you do not miss monthly payments on any recurring debt—including your credit card. Staying on top of due dates will not only help your credit score improve but can also prevent late fees and penalties from being added, which can ultimately keep you in a vicious cycle of debt. 

Paying your credit card bill on time will help you maintain a good credit score. Keeping a good credit score is crucial for getting loans and mortgages to get future loans and credit lines at lower rates.

Pay Your Bill Early

Do you know what’s better than paying your credit card on time? Paying it early! To avoid late fees and penalties, make sure you pay your bills before the due date. The sooner you do, the less likely you are to forget and be charged with additional charges.

Automatic Payments

How to ensure that your payments will always be on time? Just sign up for automatic payments that are pulled directly from your bank account! 

Almost every credit card company can offer an automatic payment plan. These plans allow your recurring payments to be withdrawn from your bank account on their due dates. Automatic payments take away the need to remember to schedule payments on your own. This will help you avoid allocating those funds someplace else. Keeping your payments regular is the best way to control credit card debt. Even though your bank is making the payments for you, be sure to note that the money is coming out of your account. That way, you will be less likely to overspend elsewhere (and have to use your line of credit to bail you out of a tight spot).  

Pay More Than The Minimum Payment

Ah, the minimum payment. After a month of heavy spending, it’s relieving to see a bill that only requires you to pay a fraction of the balance.

While monthly payments cover the interest you earn on purchases, they barely touch the total balance. A lot of people don’t realize that credit card interest compounds daily. That means that if you don’t make large payments that eat away at your balance, the minimum payment is absorbed by the interest on the next billing cycle. If you’re making minimum payments and seeing virtually the same balance every month, that’s why.

Keep Within Your Limit

When you are issued a credit card, it comes with a credit limit. Your limit is the maximum amount that you can charge to your card. Your limit is typically based on things like your income and overall creditworthiness (we’ll talk more about that later). 

It’s important to understand that credit limit and available credit are not the same things. Available credit is the money you can borrow minus any outstanding debt. So if you have a $200 balance on a card with a $500 limit, your available credit is just $300.  

The consequences for exceeding your credit card limit depend on your issuer. Some companies will decline any purchase that will cause you to exceed your limit. On the other hand, a credit card issuer may offer over-limit protection for purchases that allow you to go over your limit. But, those purchases will carry a fee—similar to an overdraft fee on a checking account or debit card. These charges can range from $25 – $25 per transaction. After a few over-limit purchases, these fees can add up. And just like any other late fees, they will be added to your balance and accrue interest. 

Going over your limit may also cause your account to go into default. Some  issuers consider over-limit activity the same as a violation of their user agreement. As a result, they can hike up the interest and add additional penalties that cause serious financial issues. Additionally, loan defaults will go on your credit report and affect your credit score for up to seven years. 

To avoid having to repay more than what you spend, it’s a smart move to never go over your limit, even if you’re allowed to. 

Choose a Credit Card Payment Strategy

Managing a credit card or cash advance loans alongside other loans and bills can get overwhelming. To avoid being controlled by debt, the best move is to develop a strategy for repayment. 

There are a couple of popular ways people handle debt that can come in handy for managing credit cards: The debt snowball and debt avalanche methods.  

The debt snowball method uses all of your available funds for debt repayment to pay off the smallest balance. Once that’s paid off, you would move to the next smallest amount. This way, you’re able to eliminate balances on multiple accounts quickly.

On the other hand, the debt avalanche method orders your credit cards by the interest rate. So by paying off the account with the highest interest rate, you decrease the amount of interest you’re being charged sooner than later. 

Each of these methods has their pros and cons and ultimately depend on the size of your credit card debt and the number of different accounts. However, if you are in credit card debt across multiple accounts, making a plan is critical.  

Monitor Your Credit Score 

Credit scores are one of the most accurate gauges of one’s financial fitness. Missing a payment affects your credit score, which is a rating that reflects the likelihood of you missing a payment.  

Credit scores estimate how you use money and handle debt, measured by different scoring models. These scores are determined by a credit score algorithm used by the three major credit bureaus—Equifax, Experian, and TransUnion. 

Credit Scores range from 300-850: 

  • 300-579: Poor
  • 580-669: Fair
  • 670-739: Good
  • 740-799: Very good
  • 800-850: Excellent

To calculate your credit score, credit bureaus review factors that make up your financial history. The two most important factors that directly affect credit card usage are positive credit history and your credit utilization ratio.

Payment History 

Your payment history is the record of every late or delinquent payment you’ve made. Credit card issuers and lenders report late payments to the credit bureaus. Above anything else, lenders want to know that you are a responsible borrower that can repay loans and credit cards. Credit history is a great way to determine that.

Lenders report payments that are over a month late to the bureaus. Those reports negatively impact your credit report and lower your credit score. However, you can work with virtually every creditor or lender to renegotiate your payments. In the end, lenders want their money, so they will work with you to make it as easy as possible to get the amount owed. If you foresee a problem with making a payment, contact your creditor no later than 30 days past the due date to explore possible arrangements.

Credit Utilization Ratio 

Your credit utilization is the percentage of your available credit that you’re using. For example, let’s say you have a card that has a limit of $1,000. At the end of a month of spending, the balance on the card is $250. That would make your credit utilization ratio 25% (25:100).  

Your credit utilization reveals how you use your credit and the frequency at which you pay the credit card account off. A high credit utilization ratio can indicate to lenders that you use credit that you don’t responsibly repay. To have a good credit score, you need to keep your credit utilization low.

The best way of doing this is by using less than 30% of your available credit. Doing so will show that you are responsible with money (since you pay back what you owe)

Having good credit can give you access to affordable loans and credit cards with low interest rates. And when it comes to credit cards, a good credit score can also get you approved “perks,” like no annual fee or a 0% Annual Percentage Rate (APR). 

Credit Card Debt Consolidation

Managing credit card debt can be challenging. On the other hand, managing multiple lines of credit can seem next to impossible. While it may seem like canceling a credit card will help manage your debt, this may end up harming your credit score. One of the most popular solutions for settling more than one credit card debt is a debt consolidation loan.

A credit card consolidation loan involves taking out a new loan to pay off all of your old credit card balances at once. The loan might be a personal loan from a bank, peer-to-peer lender, or debt consolidation company. 

The three most common reasons people choose to consolidate credit card debt are:

  1. To lower the interest they are paying each year by consolidating high-interest rate balances into one low-interest rate payment.
  2. Eliminating the need to make monthly installments on multiple loans and reduce payments for those with high monthly minimums.
  3. To take advantage of promotional rates or other offers that may not be available on their current cards.

With this loan, you will have one lower monthly payment due each month on one set schedule instead of many different payments from different credit cards going toward other balances with varying interest. This streamlining will allow you to make monthly budgeting more manageable and keep your credit score healthy. Just be sure to make that loan payment on time!   

FAQ: Wise Credit Card Management 

How can I effectively manage all my credit cards to maintain a solid credit history?

To manage all your credit cards effectively, ensure you use each card periodically, pay bills on time, and keep track of the credit utilization ratio on each card. Regularly reviewing your statements can help you maintain a good credit history.

What are the best practices for monitoring spending habits on a rewards credit card?

Monitor your spending habits by regularly checking your credit card statement. Ensure that your spending aligns with your budget, especially when chasing rewards, as overspending can negate the benefits of having a rewards card. 

How can balance transfers affect my financial health?

Balance transfers can be a strategic tool for managing debt. Transferring high-interest balances to a card with a lower interest rate can reduce the amount of interest you pay, thereby improving your financial health. However, be mindful of transfer fees and the terms of the new account.

What steps should I take to protect myself from credit card fraud?

To protect against fraud, regularly review your statements for any unauthorized transactions. Use secure websites for online purchases, never share your credit or card information recklessly, and report lost or stolen cards immediately.

Is it beneficial to have multiple rewards cards?

Having multiple rewards cards can be beneficial if they align with your spending patterns and goals. However, it’s important to practice wise credit card management to avoid overspending and to ensure that the benefits outweigh any annual fees. You want your rewards credit card to be worth it

How do annual fees impact the value of a rewards card?

Annual fees can diminish the value of rewards earned on a line of credit. It’s important to calculate whether the rewards and benefits you receive from the card exceed the cost of the annual fee.

What are some effective strategies for paying credit bills on time?

Setting up automatic payments, creating calendar reminders, and budgeting for your credit card bills can help ensure timely payments. Consistent on-time payments are crucial for maintaining a good credit score and financial wellbeing.

How can I use my card statement to improve my credit card management?

Your statement provides detailed information about your spending, payments, and interest charges. Regularly reviewing it can help you track your spending habits, identify areas for improvement, and adjust your budget accordingly.

What role does a credit history play in obtaining a rewards card?

A solid credit history typically indicates responsible credit card management, making you more likely to be approved for rewards cards with better terms, such as lower interest rates and higher rewards rates.

How can I balance the use of rewards credit cards with maintaining financial health?

Balance the use of rewards credit cards by ensuring that you pay off balances in full each month to avoid interest charges. Also, choose cards that align with your natural spending patterns and avoid spending more just to earn rewards.

CreditNinja’s Thoughts on Managing Credit Cards

Anything from surprise repairs to medical emergencies can blow a budget quickly. For those times, having a personal line of credit can be the solution to your financial problems. But, many people end up abusing credit cards. The power to spend can cause us to make snap decisions and make purchases that we ultimately can’t afford. 

CreditNinja encourages you to take time to sit down with your finances and your bills, and make a plan that you can follow. Use some—or all—of the tips above to build a strategy that will work for you. And don’t stop trying until you settle on a good plan. If you don’t practice discipline in managing your debt, you can wind up getting caught in a financial trap that’s hard to escape! 

Looking for more information on credit cards, managing a budget, and other tools to help you handle your finances? Check out the CreditNinja blog dojo for tons of free resources! 

References:
1. Analysis & Guides | American Bankers Association
2. What Is the Average Number of Credit Cards per US Consumer? | Experian

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