Credit cards are easy to come by and even easier to use. If you let your spending get out of control or take on too many loans, you could face big money troubles. 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 score in healthy shape.
1. Make Payments on Time
The most important credit rule is to make your payments on time. Stellar payment histories are key to establishing a good credit score. Payment history plays the largest role in how your credit score is calculated, and one missed bill will definitely have an impact. Missed bills can also cause some major damage to your wallet, as unpaid balances can be subject to penalty annual percentage rates and late payment fees.
Some bills can be set up to be automatically paid, 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, this might not always be possible. Make sure you make at least minimum payments before the monthly bill is due to avoid late fees or lowered credit scores.
Additionally, “if you have problems paying bills on time, don’t get a credit card,” says Karen Carlson, director of education for the nonprofit agency InCharge Debt Solutions. Looking at your payment track record for other past bills can help you determine whether or not you’re responsible enough to handle the potential pitfalls of a credit card.
2. Maintain a Low Credit Utilization Ratio
After payment history, credit utilization ratios are the biggest contributor to your credit score. Your credit utilization ratio is the proportion of how much credit you have available to how much you are using. Coming too close to these 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.
Exceeding that limit makes credit providers uneasy and negatively impacts your score, even if you exceed it by only a little. It’s also harder to pay back these larger balances on time, which can lead to a host of other issues.
Follow this credit rule and don’t let anyone fool you into thinking you need to carry balances to give your score a boost. “I have never seen a credit scoring model award points for that,” says Deatra Riley, financial education manager for nonprofit credit counseling organization CredAbility. “It’s really about the account being paid as agreed.”
3. Review Your Credit Score Regularly
Whenever you’re dealing with your credit profile, whether by paying a bill or by using your card, think of the impacts it could have on your score. The only way to properly gauge this impact is by knowing what your credit score actually is. A good rule of thumb is to check your credit report at least once a year to ensure its accuracy. You can also monitor your score for free with the Credit Report Card.
Get into the habit of reviewing your credit score before you apply for a new loan. If you’re not confident in it or if it’s lower than you expected, you may want to focus on building it before you add any credit cards or installment loans. Most institutions are reluctant to give loans to people with poor credit, so your chances of being approved for a loan increase if you take the time to improve your score first. When your credit is good, however, you should use it to the fullest extent.
“Be creditworthy when the opportunity arises,” Carlson says, so you can get the best interest rates on each line of credit. You’ll also be eligible to score the best rewards credit cards.
4. Understand the Terms and Conditions
Terms and conditions vary for every account and from provider to provider. It’s important to read through every single loan or credit card contract before you agree to anything. Consider more than just potential perks and a generous credit limit. According to Brent Neiser, senior director at the National Endowment for Financial Education, you should check what interest rates are being offered and when they will be applied. You also want to thoroughly read through fee structures so you have a good sense of the costs associated with each line of credit.
Additionally, Neiser says to ask what the incentives are. If you didn’t have the chance to properly review your contract before you agreed to its terms, you should make time to read through every page, including the fine print. Riley also suggests printing out contracts and keeping them in a safe, secure place so you can easily access them should you encounter an issue.
The three credit bureaus, Experian, Equifax and TransUnion, legally collect a good deal of your credit data, including your payment history and outstanding debts. Knowing the ins and outs of your contract can help protect you if these bureaus ever make an error, which you are legally allowed to dispute.
5. Spend with Your Budget in Mind
A credit card is painless to use and often rewards regular spenders with benefits. Having one can influence all your spending habits. But special offers can easily be canceled out by uncontrolled spending that leads to a mountain of interest-incurring debt instead. To avoid digging yourself into a hole of debt, Carlson advises using credit cards along with a firm budget that contains a savings plan.
“This is the [credit rule] most people don’t follow,” she says, because it’s easy to think of a credit card as a financial lifeline. However, you should use credit cards only for items you could pay for yourself without credit.
“Don’t use a credit card as a replacement for your emergency fund,” Carlson says. “Credit is a wonderful tool to meet the needs of positive events. It’s not a tool for negative events.”
6. Plan for Future Expenditures
Treat your credit card usage as you would a budget for your own money. Plan for large purchases you expect to make and handle your balance carefully. Avoid incurring needless debt for small purchases if you’re planning on spending a large amount in the near future.
Of course, you can’t plan for every purchase. Still, responsible use of your card can help cushion those large purchases and make it easier to pay your provider back. Balance the use of small and large purchases on your card to keep your debt in a manageable range.
7. Balance Your Credit with Your Income
Credit cards aren’t income replacement, and you shouldn’t treat them as such. You’re better off paying for small purchases with cash or with your debit card. Still, you should use your card fairly frequently to help boost your credit score and keep the account active. Most advisers recommend going no longer than three months without using your card.
You should also have a limit that’s in accordance with your income and your spending habits. If you’re using a big portion of your limit, your utilization rate is probably going to be too high and you’re likely damaging your credit score. Increasing your limit will lower your utilization rate, but you should consider this carefully. Having a higher limit will tempt you to spend more of that available money, potentially increasing your debt-to-income ratio. Be sure you’re capable of paying off a larger debt before going this route.
8. Don’t Have Too Many or Too Few Credit Cards
Having too many credit cards has pitfalls. First of all, signing up for a card in the first place impacts your credit score negatively. It also tempts cardholders to spend more and fall deeper into debt. However, spreading spending over multiple cards keeps your utilization rates low and can help boost your credit score. Having multiple cards can also give you benefits from multiple providers.
It’s all about balance here. You really only need one card for a good credit score, but if you spend regularly, having multiple cards may help your score more. Keep in mind that some lending 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, staying at a good utilization rate and using financial planning can all help you become a responsible credit card user. Follow these eight credit rules and managing your credit score can be simple and keep you in control of all your finances.