During the coronavirus stay-at-home and safer-at-home periods, many of us have been buying groceries and other necessities on the internet using our credit cards. This has reminded me that it might be a good time to review some of the basics for the use of credit cards.
Fully Pay Card Debt Each Month. It’s important to use your credit cards wisely. The thing that I stress is that it’s best to pay off the balance in full each month. Paying in full avoids interest payments which are notoriously high for credit cards. Paying in full also helps to ensure you are spending less than you earn since carrying a balance on a credit card is a red flag for overspending. If your card offers an automatic-payment feature, just select the pay-in-full option. Carrying credit card debt is not only costly, but it can also adversely affect your credit score. For example, one factor in calculating your credit score is the ratio of total debt to available credit. If you are not able to pay the entire balance monthly due to short-term income issues, you should always make at least the minimum payment to avoid penalties and higher interest rates.
Keep an Eye on Charges. Another best practice is to monitor your credit card statements looking for errors and fraudulent behavior. Minimally, you should carefully review your monthly statement. Better yet, review your statement online weekly or biweekly to look for problems.
Get the Right Card. You probably already have one or more credit cards. However, it might be worthwhile to review whether it’s the best card for you. These days, many companies offer some kind of a premium for having their card. For example, some cards offer airline travel points or cash back or a discount at the issuing company. It’s good to see which benefits best suit your needs and whether they’re worth the annual fee that is often charged. If these premiums aren’t useful to you, it’s probably best to search for a no-annual-fee card. Certainly the interest rate and the late-fee charges are important considerations too.
Don’t Cancel All of Your Cards. You might think that it’s a good idea to cancel all your infrequently-used cards to simplify things. That sounds good, but can actually damage your credit score. The reason is that the denominator of the debt-to-credit ratio is the total of all of your credit card limits. Closing a card reduces that denominator which increases the ratio. I do want to emphasize that it’s important to not think you can improve your credit score by taking out a bunch of credit cards all at once to increase the ratio’s denominator. This is because the credit agencies’ models frown on taking out cards too frequently so this will actually hurt your credit score. Also, your length of credit history is important to your credit score. So you should consider keeping your oldest card.
Immediately Report Card Loss. One final credit card tip that is hard to overemphasize is to promptly report the loss of a credit card. This will allow the credit card company to freeze your account before someone tries to make fraudulent purchases and will also help protect you against having to pay fraudulent charges should any occur.
Naturally the optimal use of credit cards depends on your individual circumstances. For example, you may be part of the large unemployment population right now. In this case, you need a strategy which tides you over rather than one that might be textbook perfect. Whatever you situation, we’d be happy to discuss it in a no-charge, no-obligation initial meeting. Please visit our website or give us a call at 970.419.8212 to set up an in-person or virtual meeting.
This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products. Please consult your tax or investment advisor for specific advice.