Credit Use: Smart Expenditure And Investing Strategies

Credit cards can be a double-edged sword – they can help you build a credit history, which is necessary for financing large purchases, but they can also be the cause of mounting debt if not used responsibly. The key to using credit cards responsibly is to understand how they work, be disciplined with your spending, and always pay your bills on time. This involves reading the terms and conditions, keeping your credit utilisation low, and paying off your statement each month to avoid interest charges. By using credit cards responsibly, you can enjoy the benefits they offer, such as rewards, cashback, and consumer protection, while also improving your credit score.

Understand fees and terms

Understanding the fees and terms associated with your credit card is crucial for responsible credit usage. Here are some detailed instructions to help you navigate this aspect:

Read the Schumer Box: The Schumer box, located at the top of your cardholder agreement, is a treasure trove of information. It outlines the most important interest rates and fees associated with your credit card. These include the purchase APR, penalty APR, balance transfer and cash advance APRs, annual fees, cash advance fees, late fees, and more. Understanding these terms will help you make informed decisions and avoid unnecessary costs.

Annual Percentage Rates (APR): Familiarize yourself with the different types of APRs. The purchase APR is the interest rate charged on purchases if you don't pay off your balance before the grace period ends. A penalty APR is triggered when you miss a payment and can be higher than your normal APR. Balance transfer and cash advance APRs tend to be lower and higher than purchase APRs, respectively.

Fees: Credit cards may come with a variety of fees. Annual fees are charged by some cards, often those that offer rewards and perks. Cash advance fees are incurred when you take out a cash advance, and balance transfer fees are applied when you transfer a balance to your credit card. Late fees are imposed if your payment is late, and returned payment fees may apply if your payment account has insufficient funds. Foreign transaction fees are charged for purchases made outside the US or in a foreign currency.

Grace Period: This is the period between the end of the billing cycle and the payment due date. During this time, you can pay off your outstanding balance without accruing additional interest.

Special Offers and Rewards Programs: Understand the terms and conditions of any special offers or introductory APRs that your card may offer. Clarify the rules of any rewards programs, including how to activate and redeem rewards, and what types of purchases qualify.

Purchase Protections: Some cards offer extended warranties or insurance on products or services purchased with the card. This can provide added peace of mind and protection for your purchases.

Authorized-User Fees: There may be fees associated with adding an authorized user to your credit card. This is important to consider if you plan on sharing your credit card access with someone else.

Account Opening Disclosures: When opening a new credit card account, review the account opening disclosures carefully. These will outline important information about your card, including fees, interest rates, billing cycles, and other essential details.

Consumer Financial Protection Bureau (CFPB): The CFPB is a valuable resource for understanding credit card terms and conditions. They recommend keeping your credit utilization below 30% and provide guidance on responsible credit card usage.

By taking the time to understand the fees and terms associated with your credit card, you can make informed decisions, avoid unnecessary costs, and maximize the benefits of responsible credit usage.

Pay off credit card bills on time

Paying your credit card bills on time is one of the most important aspects of using credit responsibly. Here are some detailed tips to ensure you pay your credit card bills on time:

• Set up autopay: Automating your credit card bill payments is a highly effective way to ensure you never miss a payment deadline. You can set up autopay through your bank or credit card provider. This way, you authorise regular payments to be made from your bank account to your credit card account, ensuring the bill is paid in full each month.
• Streamline your monthly bill payments: Designate a specific day each month to pay all your bills. This way, you can ensure you don't miss any payment deadlines and develop a habit of timely bill payments.
• Set reminders: Utilise phone and calendar reminders to notify you when a credit card bill payment is due. This simple step can help you stay organised and prevent late payments.
• Schedule payments: If you find it challenging to remember multiple payment dates, consider scheduling your bill payments. Most credit card companies allow you to set up automatic payments to cover at least the minimum amount due each month. You can also set up automatic payments for a higher amount, provided you have sufficient funds in your bank account.
• Keep a budget: Creating a budget and sticking to it is crucial for responsible credit card usage. Avoid overspending and only use your credit card for purchases you would typically make with cash or a debit card, such as groceries or gas. This will help you keep your credit card spending in check and ensure you have the funds to pay your bill in full each month.
• Adjust your due date: If the due date for your credit card bill doesn't align with your pay schedule, consider contacting your credit card company to change the due date. This can help you ensure you have the necessary funds available to pay your bill on time.

By implementing these strategies, you can develop good financial habits and maintain a positive credit history.

Pay more than the minimum amount

Paying more than the minimum amount on your credit card bill is a great way to save money, improve your credit score, and pay off debt faster. Here are some reasons why paying more than the minimum amount is beneficial:

You Pay Off Your Credit Card Balances Faster

If you only make the minimum payment on your credit card, it can take a long time to pay off your balance completely. For example, let's say you have a credit card balance of $5,000 with an interest rate of 20%. If you only make the minimum monthly payments of 3% of the balance ($150), it will take you four years and two months to pay off the balance. You will also pay $2,359.09 in interest charges on top of the principal amount. However, if you increase your monthly payment to 6% of the balance ($300), you could pay off the debt in only one year and eight months, saving you over $1,400 in interest.

You Reduce Your Credit Utilization Ratio

Paying more than the minimum on your credit cards will lower your credit utilization ratio, which is the percentage of available revolving credit you're using. Your credit utilization ratio is one of the most influential factors in determining your credit score, accounting for approximately 30% of your overall credit score. Financial experts recommend keeping your credit utilization rate below 30%, but the lower, the better. Maintaining a low credit utilization ratio can help you demonstrate creditworthiness to potential lenders and build a positive credit history.

You Improve Your Credit Score

As you pay more than the minimum amount and reduce your credit card balances, your credit utilization ratio decreases. This has a positive impact on your credit score, as credit utilization is a key factor in determining your score. By paying more than the minimum, you become a more attractive candidate to lenders when applying for new forms of credit, such as loans or mortgages, and you may qualify for more competitive interest rates.

You Avoid Maxing Out Your Credit Card

If you only pay the minimum on your credit card each month and continue to make purchases, your balance will gradually increase. Paying more than the minimum helps to free up your available credit and prevents you from reaching your credit limit. Additionally, it demonstrates responsible credit use to your credit card issuer.

Strategies for Paying More Than the Minimum

• Make more than one payment each month. Splitting a larger payment into smaller, more frequent payments can help reduce your overall interest charges.
• Stick to a budget and cut unnecessary expenses. Identify areas where you can reduce spending and allocate more money towards debt repayment.
• Try a debt repayment strategy, such as the debt snowball or avalanche method, to help you stay focused and motivated.
• Tap into your savings or find ways to increase your income, such as through a side hustle or selling items you no longer need.

Keep credit card balances low

Keeping credit card balances low is an important part of using credit responsibly. Here are some detailed tips to help you keep your credit card balances low:

• Set a budget and stick to it: Creating a budget and avoiding impulse purchases can help you stay within your spending limits. Use credit cards only for things you would normally buy, such as groceries or gas, instead of splurges or impulse buys.
• Understand your credit utilisation ratio: Your credit utilisation ratio compares the amount of credit you have available to the amount you're currently using. Aim to keep your credit utilisation below 30%. Those with the highest credit scores tend to keep their utilisation below 10%.
• Make frequent payments: Instead of waiting for the due date, consider making periodic payments throughout your billing cycle. This will help keep your balances low and reduce the amount of interest you pay.
• Take advantage of autopay: Set up automatic payments or use autopay features to ensure you never miss a payment. This will help you avoid late fees and maintain a good credit score.
• Request a higher credit limit: If you find yourself regularly exceeding the recommended credit utilisation ratio, consider requesting a higher credit limit. This will give you more room to make monthly expenditures without negatively impacting your credit score.
• Avoid closing credit card accounts: Closing a credit card account reduces your total available credit and can increase your credit utilisation ratio. It can also shorten the average age of your credit accounts, which may negatively affect your credit score.

Set up account alerts

Setting up account alerts is a crucial step in using credit responsibly. Here are some detailed instructions and tips to help you set up and maximize the benefits of account alerts:

• Contact your credit card company or log in to your online account to set up alerts. Most major credit card companies allow you to set up alerts through their mobile apps or online banking portals.
• Choose your preferred method of receiving alerts, such as text messages or emails. Select the option that you check regularly and that will prompt you to take action.
• Decide on the types of alerts you want to receive. Here are some common types of alerts offered by credit card companies:
• Payment due date reminders: You can choose to receive a notification when your payment due date is approaching. This helps you stay on top of your bills and avoid late payments.
• Payments posted: Get a confirmation alert when your payment has been received and posted to your account.
• Approaching credit limit: Set an alert when your balance reaches a certain threshold or percentage of your credit limit. This helps you keep your spending in check.
• Balance updates: Receive notifications about your current balance, so you're always aware of your available credit.
• Purchase alerts: Be notified of any purchases made on your card, or customize it to alert you only for specific types of purchases, such as those over a certain amount or online transactions.
• Foreign transaction alerts: Get alerts for transactions made outside your country, which can help quickly identify potential fraud.
• Card declined alerts: If your card is declined, you'll receive a notification, which can also indicate potential fraud.
• Cash advance alerts: Stay informed about cash advances made on your account, helping you detect unauthorized transactions.
• Balance transfer alerts: Receive notifications when a balance transfer is completed or attempted by someone other than you.
• Customize the alert settings based on your preferences. For example, you can choose the frequency of alerts, the specific amount thresholds, and the types of transactions you want to be notified about.
• Regularly review and update your alert settings as needed. This ensures that you continue to receive relevant and timely notifications about your account activity.

By setting up account alerts, you can effectively track your spending, prevent late payments, and enhance the security of your credit card account by quickly identifying any fraudulent activity.

Frequently asked questions