Credit cards can be a great way to build good credit. However, they can also provide a quick route to debt and financial distress. If you are in the process of trying to rebuild your credit, or simply establish credit for yourself, you’ll want to consider the following five tips.
1. Make sure you choose a credit card with the lowest APR percentage rate. Choosing one that offers three to six months with no APR is even better. This will give you time to use the card, and make timely payments without accumulating interest. Demonstrating responsibility by keeping your account in good standing will prevent your APR rate from going up, and may eventually lead to a lower percentage rate.
2. Don’t go for the cards that have a high credit limit. Having a credit card with a high limit is too tempting. It’s also a good idea to set your own spending limits. Choose an amount that you are sure you can repay in a timely and consistent manner and do not exceed that amount.
3. Many credit cards let you withdraw a certain amount of cash as well. Try to avoid this if possible. The cash usually accumulates more interest than simply using the credit card for purchases, and may even require a fee for withdrawing the cash. You may end up paying $35.00 for a $20.00 cash withdraw or more if you do not pay it back all at once.
4. Some cards allow you to pick a payment date for the card, if this is the case make sure you choose wisely. When will you have the money to make the payment? If you get paid on the 15th of each month, set up the cards payment due date for about six days after you get paid. This will ensure that you are able to make the payment, and if you pay by check, that it will get there on time. If you make payments online, try to do so at least 48 hours before the payment date, to allow processing time. Late payments will reflect badly on your credit score.
5. Stay beneath 50% of your credit limit and, if possible, don’t make any purchases you won’t be able to pay off within six months. If you make purchases with your card that exceed these limits, you may very likely end up in worse debt and damage your credit rather than improve it. Using these guidelines when charging your card will help you keep your account in good standing, which will reflect well on your credit score.
To figure out whether you will be able to pay off a purchase in six months do the following.
a. Take the purchase cost: (example $500.00)
b. Multiply by percentage rate: (example:12%APR = 500 x 12%)
c. Add the percentage rate to the purchase cost: (example: $60 + $500 = $560)
d. Subtract your monthly payment from the total: (example: $560 - $100 = $460)
Repeat the above steps six times, with the amount you end up with each time, to see if the total will be paid off in six months or less. For instance, in the example above we ended up with $460.00, so we would now multiply that by 12% (which is, $55.20), add them together ($515.20), then subtract our monthly payment ($100), and we end up with $415.20. Continue to do the same now with the $415.20 we’re left with.
6. Make at least double the minimum payment. If you only make the minimum payment, it will take forever to pay off your balance. It’s even better if your payments cover the interest accumulated on the card each month in addition to a double the minimum payment.
For example, if you have a balance on your card of $200.00, and a 14% APR, your account will accumulate $28.00 in interest that month. If your minimum payment on the card is $10, you should pay double that, plus the $28.00 in interest. So, your monthly payment would be, $48.00.
7. Do not make random purchases. It’s tempting when you have a credit card, to buy something that you want right now, and pay for it later, but this is a big mistake. This is exactly how people get into serious debt with their credit cards. If you want to use a credit card to build good credit, you have to set limits for yourself and be responsible. If you can’t seem to turn down great deals at the store, do not bring the credit card with you.
Having a credit card can be a blessing or a curse; it’s up to you. Either way, there’s no doubt that it requires a lot of responsibility and discernment. If you have a credit card or are planning to get one, keep these tips in mind.
