You can get a good credit score by simply using your credit wisely.
Good credit can give you flexibility in the types of loans and credit cards, access to lower interest rates, and great rewards for new accounts.
So what are some of the strategies that can help you use credit wisely?
In this post, we will explore some strategies on how best to use your credit so you can enjoy the actual benefits of having good credit.
- Pay your credit card payments in full and on time to avoid high-interest rates that are compounded
- If you need repayment assistance, consider a payment plan with a lower fixed fee instead of a minimum payment
- Take advantage of the credit card grace period to help with your financial situations
- Review terms and conditions to avoid services with high-interest rates and fees like cash advances
- Budgeting and staying within your limit is the best way to use your credit wisely
- Consider tools like Credit Karma to help monitor your credit for free
What Are Some Of The Strategies That Can Help You Use Credit Wisely?
A 2023 study found that 35% of Adults with a credit report have debt collections.
Good spending habits that allow you to pay your balances in full and on time every month make all the difference in having a strong credit score.
Reasons To Use Credit Wisely
- Qualify for new credit
- Use credit to start a business
- Qualify credit check for job offers
- Approval for mortgage or lease
- Earn credit card rewards
As you can see, using credit wisely can lead to a good credit score that can help you in many ways.
Step-by-Step Strategy To Use Credit Wisely
I have compiled a step-by-step guide to help you practice good credit habits.
As always, I will share my experience and knowledge using methods and guidelines from the bank I worked for when making mortgage loan decisions.
1. Always Pay Your Balance In Full
A general rule of thumb is always to pay your credit balance in full, which will lay the foundation of your creditworthiness.
After all, when you pay your balance in full, you won’t put yourself in a position to accumulate debt.
Instead, using credit to help you earn rewards for free, like cashback, is a good way to stay ahead.
2. Don’t Get Hooked On Minimum Payments
Why do credit card companies give you the option to pay only the minimum amount, and you are still considered to have good standing?
That’s precisely what they want you to do so they can earn the highest interest rate on the market from you.
Credit card interest rates typically start at 20% and can go up to 30%, that’s $200 to $300 for a $1000 balance.
When you continue to make monthly minimum payments, the credit card company will start to compound the interest rate charged from the previous month since the minimum payments are usually lower than the interest charged.
As you can see, the minimum payment option is a tool credit card companies use to leverage the power of compound interest.
So don’t let them win at their own game, and start using your credit cards wisely by never using this option.
3. Make Your Credit Card Payments On Time
When you make your payment past the due date, that’s when the credit card company adds interest charges.
As mentioned above, the interest rates range from 20% to 30%, which is extremely expensive.
Consider calling in to ask if the interest charge can be dropped as an exception to rare oversight.
4. Take On A Debt Repayment Strategy
When you are tight on cash and need an extra month or two before you can pay your credit card debt in full, consider using a repayment plan with a fixed fee.
Most repayment plans have a 0% interest rate, with about 4% to 8% plan fee added.
This could be beneficial with the plan fee calculated as a fixed fee without additional compounded interest.
5. Avoiding The Credit Card Debt Trap
With so many good credit rewards and cashback offers, it’s important to stay on course by not changing your spending habit at the expense of chasing welcome offers.
That’s partially the psychological game these credit companies like to play so you can spend more than you can afford by alluring you with high welcome offers.
It’s very easy to get into credit card debt from overspending, so use your credit cards wisely to avoid credit card debt.
6. Avoid Using Credit Cards To Finance An Unaffordable Lifestyle
It’s important to spend less than your income level.
If you can’t afford something, don’t make purchases using your credit card, as this can quickly get you into undesired financial trouble.
Instead, save up and only make purchases when you already have the money saved in your bank account to pay the full balance.
7. Avoid Using Credit Cards If You’re Already In Financial Trouble
Avoid using credit cards if you’re already in a financial situation.
Only use your credit cards for necessary purchases or when an emergency arises so you are a fully responsible credit card user.
Your goal should be getting out of your financial trouble.
Take advantage of the credit card grace period to help you escape your financial trouble.
8. Stick To A Budget
Having a budget ensures that all your spending aligns with what you can afford.
It also helps with the temptation of impulsively buying more than your income level can comfortably support.
Plus, it lets you know how much you can set aside for savings and emergency funds.
Creating and sticking to a budget can help ensure you’re using your credit cards responsibly and not overspending.
9. Don’t Use Cash Advances
Cash advances are one of the most expensive ways to use your credit card.
Unlike everyday purchases, cash advances will charge cash advance fees and start accruing interest immediately.
Avoid using cash advances, which can quickly add up and make paying off your credit card debt more difficult.
If you have to use cash advances, consider prepaying your credit with a negative balance to avoid interest charges.
10. Understand The Interest Rates And Fees
Most credit cards come with a lot of interest rates and fees.
The typical fees are:
- Interest on balances past the grace period
- Cash advance interest
- Cash advance fee
- Overlimit fee
- Foreign exchange transaction fee
As long as you pay your balance in full, shown on your monthly statement, before the due date, you should not have to pay any interest or fees.
11. Read Your Card Agreement And Know Your Terms
Every credit card company have different sets of agreement.
It’s important to read through the fine print of your credit card agreement, so you know all the terms and conditions of using your credit card responsibly.
If you are unsure of any verbiage on the terms and conditions, try calling in and ask the agent to explain and clarify the definition to avoid future surprises.
12. Stay Below Your Credit Limit
Staying below your credit limit is crucial to maintaining a good credit score.
Two major factors can quickly lower your credit score:
- Overlimit credit trades
- High to near full credit utilization
Credit bureaus heavily emphasize these two factors, which can quickly increase and decrease your credit score.
Always keep your available credit high to avoid credit score fluctuations.
13. Don’t Run Up The Balance In Reliance On A Temporary “Teaser” Interest Rate
Some credit cards offer an introductory interest rate, also known as a “teaser” rate, that is usually extremely low and only lasts for a short period.
It’s always a good reminder that these rates are only temporary, and once the promotional period expires, you will be charged the regular rates.
Key Considerations For Using Your Credit Wisely
Whether you are rebuilding or improving your credit, the most important factor is having a strong credit profile.
Paying your balances in full and on time, combined with a credit monitoring tool, will improve your credit score significantly.
Monitor Your Credit Card Balance
Regularly monitoring your credit balances on your credit report can make sure:
- Balances on the credit report match the actual balances from the credit statement
- Quickly spot unusual activities
- Accuracy of payment history
Helpful Tools for Keeping Credit Card Debt in Check
Budgeting apps like Mint are useful for tracking credit card balances and setting up user-friendly payment reminders so you never miss a deadline.
It’s also important to check in with credit monitoring services like Credit Karma to stay ahead of fraudulent activities.
Build a Solid Credit History
The goal of using credit wisely is to build a solid credit profile.
Paying bills on time and low credit utilization are crucial in developing a strong credit score.
This will be useful when you want to take out a loan or apply for other financial products.
Wrapping Up and My Experience With Using Credit Wisely
Taking advantage of the steps laid out in this post for using a credit card wisely will give you an advantageous position for your financial health in the future.
From my experience, I’ve found that staying organized and monitoring my spending has been key to responsibly using my credit.
You can make smart financial decisions with a consistent approach to paying your balances in full and creating a budget plan.
Frequently Asked Questions
How to use a credit card to improve or maintain your credit scores?
Making timely payments and keeping your balance low will improve your credit score while showing lenders that you handle credit responsibly.
How To Use Credit Card To Build And Rebuild Your Credit?
Start using the card for smaller purchases that you can immediately pay off, such as groceries or gas.
As you build a good repayment history, you can slowly increase the amount of credit you use.
This will help you build your credit over time.
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