Credit Card Do's and Don'ts
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Recently, I have received a few inquiries with regards to credit card spending. It sounds to me like people are generally thinking about how they can be responsible with their credit cards. So, with that in mind, I am devoting this blog post to the proper use of credit cards.
First off, I would like to share a personal story. When I first went into college after high school, I did not have a lot of money nor resources. I was a lifeguard and swim instructor at the local YMCA, and that job did not pay very well. But, it was my joy at the time. When I received my first credit card offer in the mail I was ecstatic because I thought, “Hey, there's a free $1,500 available to me!”. It was never really explained to me in high-school what the credit card offer really meant nor what having an APR was all about. So, I signed up and went for it. I started to rack up debt on this very first credit card of mine. Once it hit its limit, that’s when I realized… Uh-oh… The minute I realized my folly, I immediately shredded the credit card and have not looked back!
Do not let this happen to you!
Even though there is a major warning that comes with every credit card, debt still happens to be a very real thing for a lot of people. I think we can get so focused on the here and now and not realize what this can mean a year or two or five down the line. We are entranced by sales, we are drawn in for the newest piece of technology, and then there are times where the unfortunate happens and we have to lean on that credit card to pull us through some tough financial situations. There has got to be some psychology out there on this . . . but for now -- let’s stick to the numbers.
In this fictitious scenario a beginning balance of $5,000 with an APR of 20% will take 5 years to pay off. This scenario assumes that you are charging $100 per month and paying off only $250 against the balance. The total amount of interest that is paid over time will be $2,359.09 during that time. I wanted to illustrate this with a graph so you can take a step back a minute to see what this does over the course of 5 years. My hope is that when you see the trends, you will be more adverse to collecting debt on a credit card.
Here is a pretty chart to show you the trending over time.
Here are some helpful do’s and don’ts for credit card spending:
Do … pay your credit card on-time every month -- not only is this just good practice, making on-time payments contributes to 35% of your credit score.
Do … find a credit card that has 0% APR and transfer your large balance to that card to pay less in interest over time.
Do … find a credit card that has really great perks, like cash back, or points. You will get more bang for your buck!
Do … keep in mind that when applying for new credit your credit score will take a small hit, but will bounce right back up a few months later.
Do … pay your credit card balance in full every month -- The amount you owe contributes to 30% of your credit score. So, do your very best to either keep your balance low, or pay it back in full on-time every month.
Do … use a credit card for occasional purchases -- this does help you over the long term establish really good credit and contributes to 15% of your credit score. Your credit score essentially wants to know, “how long your credit accounts have been established, including the age of your oldest account, the age of your newest account and an average age of all your accounts.”1
Do … Check your credit report monthly. There are monthly monitoring apps out there. I personally like WalletHub, but Quizzle is great as well. You can check your credit report for free annually at: https://www.annualcreditreport.com/index.action -- In fact, if you rotate every 3 months or so between the credit reporting agencies you could check it for free on a quarterly basis.
Don’t ... charge more on your credit card than you can financially afford to pay off. There are ways of circumventing this. For example, someone who is financially stable can apply for a zero percent APR credit card in order to pay for a much needed item. Then calculate the amount it would take to pay it off before the APR kicks in, divide that evenly and make on-time payments each month.
Don’t … hand out your credit card to anyone -- I think this is obvious, but I feel like it still needs to be stated.
Don’t … put yourself in a scenario that would entice you to spend more money. If going to the mall every weekend means you are spending a couple hundred dollars each trip, try something different. Go on a walk around your local neighborhood or park. Sometimes a change of scenery is all we need!
Let me know in your comments below what helps you from spending more money than you have!