Credit cards are easy to find and even easier to use. If you let your spending get out of hand or take out too many loans, you could be in big money trouble. On the other hand, you want to spend enough to improve your credit and keep it in a good range. Here are eight credit rules every consumer should follow to keep their finances and credit rating healthy.
1. Make payments on time
The most important rule of credit is to make your payments on time. Stellar payment histories are essential for building a good credit rating. Payment history plays the most important role in how your credit score is calculated, and a missed bill will definitely have an impact. Missed bills can also cause significant damage to your wallet, as unpaid balances can be subject to annual percentage rates of penalties and late payment fees.
Some invoices can be set up to be paid automatically, which is a great way to avoid the stress of a missed payment. While it’s always a good idea to pay off everything you owe, it might not always be possible. Make sure you make at least the minimum payments by the monthly bill due date to avoid late fees or reduced credit scores.
Plus, “If you’re having trouble paying your bills on time, don’t get a credit card,” says Karen Carlson, director of education for the nonprofit InCharge Debt Solutions. Examining your payment history for other past bills can help you determine whether or not you are responsible enough to handle the potential pitfalls of a credit card.
2. Maintain a low rate of credit utilization
After payment history, credit usage ratios are the biggest contributor to your credit score. Your credit utilization ratio is the ratio of the credit you have to the amount you use. Coming too close to those credit limits can seriously hurt your score. Instead, follow the credit rule of never using more than 30% of your credit limit at any time.
Going over this limit makes credit grantors worried and negatively impacts your score, even if you only slightly exceed it. It’s also more difficult to pay off those larger balances on time, which can lead to a host of other problems.
Follow this credit rule and don’t let anyone trick you into thinking you need to carry balances to boost your score. “I’ve never seen a credit scoring model award points for this,” says Deatra Riley, head of financial education for the nonprofit credit counseling organization CredAbility. “This is really the account paid as agreed.”
3. Check your credit score regularly
Anytime you deal with your credit profile, whether it’s paying a bill or using your card, think about the impacts it might have on your score. The only way to properly assess this impact is to know your credit score. A good rule of thumb is to check your credit report at least once a year to make sure it is correct. You can also track your score for free with the Credit report card.
Make a habit of reviewing your credit score before applying for a new loan. If you don’t trust it, or if it’s lower than you expected, you might want to focus on building it before adding any credit cards or installment loans. Most institutions are reluctant to give loans to people with poor credit, so your chances of getting approved for a loan increase if you take the time to improve your score first. However, when your credit is good, you need to use it to the fullest.
Also read: One of the reasons FICO scores go up (it has nothing to do with jobs or the economy)
“Be creditworthy when the opportunity arises,” says Carlson, so you can get the best interest rates on every line of credit. You will also be eligible to get the best rewards credit cards.
4. Understand the terms and conditions
The terms and conditions vary for each account and from one provider to another. It is important to read every loan or credit card agreement before agreeing to anything. Consider more than just potential benefits and a generous credit limit. According to Brent Neiser, senior director of National endowment for financial education, you should check what interest rates are offered and when they will be applied. You also want to carefully read the fee schedules so that you get a good idea of the costs associated with each line of credit.
Additionally, Neiser says to ask what the incentives are. If you haven’t had a chance to properly review your contract before agreeing to its terms, you should take the time to read every page, including the fine print. Riley also suggests printing the contracts and keeping them in a safe and secure place so that you can access them easily if something goes wrong.
The three credit bureaus, Experian, EXPGY,
and TransUnion TRU,
, legally collect much of your credit data, including your payment history and unpaid debts. Knowing the ins and outs of your contract can help protect you if these bureaus make a mistake, which you are. legally allowed to challenge.
5. Spend within your budget
A credit card is easy to use and often rewards repeat customers with benefits. Having one can influence all of your spending habits. But the specials can easily be overruled by out-of-control spending that leads to a mountain of debt with interest. To avoid stepping into a debt hole, Carlson advises using credit cards with a firm budget that contains a savings plan.
“It’s the [credit rule] most people don’t follow along, ”she says, because it’s easy to think of a credit card as a financial lifeline. However, you should only use credit cards for items that you could pay yourself without credit.
“Don’t use a credit card to replace your emergency fund,” says Carlson. “Credit is a great tool to meet the needs of positive events. It is not a tool for negative events. “
6. Plan future expenses
Treat your credit card use as you would a budget for your own money. Plan the major purchases you plan to make and manage your balance carefully. Avoid taking on unnecessary debt for small purchases if you plan to spend a large amount in the near future.
Of course, you can’t plan every purchase. Still, using your card responsibly can help amortize those important purchases and make it easier for your provider to get reimbursed. Balance the use of small and large purchases on your card to keep your debt within a manageable range.
7. Balance your credit with your income
Credit cards are not a substitute for income and you shouldn’t treat them as such. Small purchases are best paid with cash or with your debit card. Nonetheless, you should use your card frequently enough to improve your credit score and keep the account active. Most advisors recommend that you go no longer than three months without using your card.
You should also have a limit based on your income and spending habits. If you use up a large portion of your limit, your usage rate will likely be too high, and you will likely damage your credit score. Increasing your limit will reduce your usage rate, but you need to think carefully about it. Having a higher limit will cause you to spend more of that available money, potentially increasing your debt to income ratio. Make sure you are able to pay off larger debt before you take this route.
8. Don’t have too many – or too few – credit cards
There are pitfalls of having too many credit cards. First of all, signing up for a card has an impact on your negative credit rating. It also prompts cardholders to spend more and take on more debt. However, spreading the expense across multiple cards keeps your usage rates low and can help improve your credit score. Having multiple cards can also provide you with benefits from multiple vendors.
See:Here’s What Happens To Your Credit Score When You Give Up Credit Cards
It’s all about balance here. You really only need one card for a good credit rating, but if you spend regularly, having multiple cards can improve your score. Keep in mind that some loan companies view having multiple credit cards negatively.
Credit rules to boost your scores
Having credit cards can be a slippery slope, but it doesn’t have to be. Checking your credit report, opening the right number of cards, maintaining a good usage rate, and using financial planning can all help you become a responsible user of your credit card. Follow these eight credit rules and managing your credit score can be easy and you can stay in control of all of your finances.