Tips for using your credit card responsibly
Credit cards are convenient to use, but the convenience they offer costs a lot of money. If you fail to use them responsibly, you can fall into insurmountable credit card debt.
Before you understand how responsibly you should use your credit card, you should acquaint yourself with basic terms.
- Interest rates define how much you will be charged if the balance is carried over every month.
- Credit limit reports the highest amount of funds you are allowed to borrow.
- There might be extra payments in the form of annual fees and transaction fees.
- They also offer reward points. You can earn cashback and other benefits as well.
- There will be a billing cycle of 28 to 30 days. At the end of this cycle, all of your transactions will be added to inform you how much you owe. This is called a statement balance.
- A statement reporting date is when your credit card company reports your balance to credit reference agencies.
- The interest-free period is a grace period within which, if the whole balance is paid off, no interest is charged.
- You can make a minimum payment each month if you cannot pay off the whole balance, but the unpaid amount will keep accruing interest.
How to utilise your credit card responsibly
Here’s how to use your credit card responsibly, avoid accumulating debt, and protect your credit score:
Pay off the balance in full
Credit cards come with a grace period to give you a chance to pay off the transaction amount in full without incurring any interest. If you fail to clear your credit card bill within this period, interest starts accruing. Credit cards charge interest by the day.
In order to avoid interest payment, you should pay off the balance in full after the bill is generated. If you cannot pay it off in full, you should still try to pay down the minimum balance. However, it cannot prevent you from accruing interest on the unpaid balance.
If you are already struggling with the settlement of an outstanding balance, you can consider weekly repayment financial support. This support is government-backed and is available for people who are on benefits.
Keep your credit utilization ratio low
A credit card enables you to borrow money up to the maximum limit it offers. However, it does not imply that you should max out your credit card. Doing so can damage your credit score, actually, if you settle the credit in full.
An increased credit utilization percentage lowers your credit score. It indicates that you heavily rely on your credit card for most of your expenses, which most lenders do not appreciate. As a general rule, try to keep your credit card balance below 30% of your available credit limit.
If you can manage to keep this ratio even lower than 30%, it is good.
Pay Off Your Credit Card Balance Before It’s Reported
As soon as your statement balance is generated, you should discharge it, because most credit card companies report the balance to credit reference agencies within a day or two. So, it is likely that you see your credit score low despite paying off the full balance within the grace period.
You do not have to wait for all transactions to accumulate by the end of the billing cycle to clear your dues. Try to pay off your balance before the reporting date. The lower the balance, the higher your credit score will be. This will help avoid racking up credit card debt.
Do not be tempted by minimum payment plans for rewards
Many credit card companies offer rewards and points to users for making minimum payments. This seems affordable and rewarding, but it can throw you into debt. Minimum payments cannot prevent you from being charged interest.
Credit card companies do it to make profits. They might not maintain transparency before you sign up for these deals, and many users do not read the small print. Whether you manage to qualify for additional rewards and points or not, you should always clear the whole balance within the grace period.
Use credit cards only when there is an emergency
You should use credit cards only when there is an emergency, and you are confident that you will be able to discharge the debt within the interest-free period.
Using credit cards for inessential expenses might be problematic for you. You might end up racking up credit card debt. Once you fall into debt, it will be painstakingly difficult to get out of it.
The final word
A responsible use of a credit card is to use it for small unexpected expenses rather than inessential expenses. Do not use it when you are not secure about your ability to repay. Carrying a balance every month will always hurt your credit score and increase your credit card balance. Pay off the balance in full.
FAQs
Can using a credit card help improve your credit score?
Yes, if you use it responsibly. Making payments in full on time and keeping balances low can help ameliorate your credit history. This might help you access affordable financial products.
Should I use a credit card for cash withdrawals?
Experts advise against using a credit card for cash withdrawals because this will incur fees and interest from the day of withdrawal. Instead, use a debit card or withdraw cash directly from your bank account.
What interest rates do credit card companies charge?
It depends on a credit card company’s policy and your credit score. Despite having a good credit score, credit cards can charge higher APRs. You should try to avoid carrying a balance to protect yourself from high interest rates.
Can I increase my credit limit?
Yes, you can do it, but lenders will assess your income, spending habits, credit score, and repayment history. A higher limit also helps with lowering your credit utilization ratio provided you do not overspend.
Paul Smith is an established financial author and writer with over nine years of experience, who specialises in personal finance, loans, credit management, and investment strategies for people throughout the UK. Paul’s expertise can be seen on leading loan websites such as Bargainloans. Through his blogs and articles Paul has helped thousands of borrowers make wiser financial decisions while his passion for study encourages people to take control of their finances with greater confidence and clarity
