Credit cards make it easy to swipe and forget — at least until your bill comes due. But, having a plan for how and when you use your card is important for a number of reasons, not least of which is your credit score and what types of cards and benefits you’ll qualify for in the future. While the convenience of a credit card is alluring, make sure you’re keeping these six things in mind before your next swipe!
1. Understand your credit card agreement
Before you open a new credit card account, it is important to understand the terms of your agreement. This way, you can be sure of any deadlines or conditions that may apply to your card. Every credit card is unique as far as what type of user they’re intended for and where they can be used, so it is crucial to understand the exact provisions for the card that you are agreeing to.
2. Track your discretionary spending
Most major credit card issuers offer spending analysis tools, which you can access from your online account. You can then analyze your spending by date, merchant category, and amount spent. These tools can help you figure out where you may need to cut back on spending and help you optimize your spending across your payment cycles.
3. Make payments on time
There are many adverse effects of making late payments. First and foremost, you may be charged a late fee for paying your balance late; most cards have specific fees that will be charged when you are late paying your monthly statement. The amount charged will typically range from $15 to $35, based on the size of your balance. For smaller monthly balances under a few hundred dollars, this can be a substantial percentage of your balance.
Another substantial consequence of late payments can be having the interest rate on your card raised. For late payments that are more than 60 days overdue, many cards have a penalty APR that gets applied indefinitely. This penalty APR is often significantly higher than the regular interest rate you were paying on your card, with most companies reporting this rate between 27 and 30 percent.
Lastly, late payments can also affect your credit score. Payment history accounts for roughly 35% of your credit score, so even a single late payment reported to credit bureaus can bring your score down. For all these reasons, it’s critical to make sure you have a plan for making all credit card payments in a timely fashion and before your bill is due.
4. Pay more than the minimum
Making your minimum payments on time is a great way to avoid fees and other penalties, and paying more than just the required amount is even better! If you only pay the minimum amount whenever your bill is due, you will likely be left holding a balance. Since that balance will accrue interest, it is often better to avoid keeping a sizable balance in your account. If possible, it is widely recommended to pay off your bill in full each month.
5. Stay below your credit limit
Your credit utilization ratio (how much of your available credit you’re using) is a common metric used to determine your credit score, and oftentimes lower credit utilization ratios are correlated with higher credit scores. A common rule of thumb is to spend no more than 30% of your credit limit. Many credit card issuers allow you to set up balance alerts — notifications that let you know by text, email or in-app message that your balance is approaching a certain level that you've set.
6. Monitor your credit
Lastly, it is very important to keep a close eye on your credit score and history. Seeing your credit report can help you visualize your overall financial health and help you prioritize payments if your income is fluctuating. By law, you’re entitled to one free credit report from each of three credit bureaus — Equifax, Experian, and TransUnion —through annualcreditreport.com. And while most credit reports will not report your credit score, most credit card companies do provide your FICO score for free (including HUECU – just look under “more” in your Online Banking portal).
Checking your credit is a great way to know exactly where your debt currently stands, and it can help you make sure all three credit bureaus are reporting information correctly. Your credit history is a big determinant of what credit cards you end up qualifying for, so it is important to always have some understanding of your credit status.