Why Smart Credit Use Matters, and a Few Easy Tips to Start You Down the Right Path
Since 2003, the American Bankers’ Association has recognized the third Thursday in October as Get Smart About Credit Day.
The goal of Get Smart About Credit Day is to encourage young people to engage in responsible credit usage, hopefully establishing positive borrowing behaviors as a lifelong habit. By creating a solid foundation of financial knowledge, well-informed consumers can make educated economic decisions that will serve them well throughout their lives.
eConsumer Services® is pleased to participate in this important consumer holiday by providing an introductory course to credit card usage.
How to Choose a Credit Card
There are countless different credit cards available to consumers. Each card has positive and negative attributes, which means it can be challenging to find a card that’s the perfect fit for your situation.
There are three basic types of credit cards, each appealing to a different consumer needs. These include cards which:
- Help You Build Credit: These are easier to qualify for and are best for young people or people attempting to build or repair credit.
- Save Money on Interest: These cards are best for irregular use, such as in case of an emergency or to perform a balance transfer as a way of paying-off another debt with no interest.
- Earn Rewards for the Cardholder: Good for those capable of paying off the balance consistently each month, these cards can acquire perks including cash-back bonuses or travel miles.
Once you’ve decided on the category of card you want, it’s time to consider the applicable characteristics of each individual option.
- Is the card reported on your credit history? Secured cards typically are not reported.
- Is there any annual fee?
- What is the APR? Will it change over time?
- Can I transfer a balance? Does the balance transfer APR differ from the purchase APR?
- Does the card offer rewards? What category of purchase offers the best rewards?
Quick Tips for Credit-Smart Practices
Once you’ve obtained your credit card of choice, it’s important to establish sound financial practices early on. Making wise decisions will build long-term credibility, while the consequences for failing to properly manage your credit will severely damage your reputation for years to come.
Financial savviness is usually determined by an individual’s credit score—which is impacted by the way in which you manage your credit and other financial habits. The better the score, the more liberties and benefits you’ll receive. However, a low score could mean you’ll struggle to do everything from secure a car loan to land a new job.
Here are six things that will help maintain good financial health.
1. Pay Bills On-Time
Whether it’s a cell phone bill, mortgage payment, or credit card statement, paying bills late could result in fees and penalties. In addition, making late payments on a regular basis will negatively impact your credit score.
Always be diligent about paying bills on time, and when it comes to paying a credit card bill, try to pay off the full balance each month. That way, you can avoid late fees, punitive charges, and unnecessary interest payments.
2. Check Your Credit Report Regularly
Whether it’s because they’re worried about what they’ll find, simply forget, or don’t understand the importance, most consumers tend to neglect checking their credit report. However, it’s important to check your credit score regularly for a few different reasons. Doing so allows you to:
- Understand which behaviors are beneficial and which are harmful toward building good credit.
- Check for accuracy to ensure that your score is not impacted unfairly.
- Ensure that no one has taken out lines of credit by using your identity fraudulently.
All consumers are legally entitled to one free credit report a year from each of the three credit reporting agencies—Experian, Equifax and TransUnion. It’s best to space these out over the course of the year and check one of them every few months.
3. Keep Older Accounts Active
Part of your credit score is determined by your credit utilization rate, which is the ratio of credit you’ve used to the total amount of credit available to you from all lenders. When you close accounts, you reduce your amount of available credit, causing your credit utilization rate to rise. As a rule of thumb, you should try to keep your credit utilization below 30% of your available credit.
In addition to your credit utilization rate, your credit history can also impact your overall score. The longer you’ve had lines of credit, the better your score will be. Closing your oldest accounts will shorten your credit history, thereby hurting your score.
While it’s tempting to close credit accounts as a way to consolidate debt and simplify your finances, doing so may actually hurt your credibility. Instead, keep older accounts active by making a few occasional purchases and paying them off immediately.
4. Don’t Run-Up Your Credit Card Balance
Remember that each time you use a credit card or take out a loan, you’re essentially borrowing money from the bank that you will be expected to pay back later. Borrowing too much can lead to a number of potential problems, from negatively impacting your credit score to creating an unmanageable mound of debt that could take years to escape.
Emergencies will happen, and it’s nice to have a line of credit available when they do. However, try to avoid charging more than 30% of your credit limit at any given time. Not only will you be keeping your debt under control, but this practice will keep your credit utilization rate low as well.
5. Stick to a Budget
This point may seem fairly obvious, but it’s surprising how many people neglect to live within a regular budget. Living above one’s means will lead to quick-mounting debt, which could grow unmanageable in just a few months’ time.
Calculate a rough estimate of all of your monthly household expenses, as well as other costs such as transportation, food, and entertainment. Compare this against how much you make during that same period.
Maintaining a budget can help you visualize if you are overpaying in any one sector, and determine where you can and should cut costs.
6. Secure Your Information
Falling victim to identity theft or another forms of criminal fraud could result in damage to your credit that will take years to resolve. Therefore, you will want to ensure that your identity and all other sensitive information is always protected.
- Keep your Social Security Card in a secure location—don’t carry it around in your wallet. Only give out your Social Security Number when absolutely necessary for official purposes.
- Shred documents which could be used to steal your identity, such as receipts, credit card offers, and bank statements. Always cut-up expired cards before throwing them away.
- Don’t give out your personal information, such as name, address, phone number, or financial information to anyone you don’t trust.
- Create complex and unique passwords for each online profile you maintain. This includes bank, tax, and other finance-related sites, as well as social media platforms.
- For each financial account you maintain, check your statement regularly for suspicious charges. If you find something, don’t panic, but contact your bank to inquire about the charge.
Now Is the Time to Get Smart
You’re never too young or too old to start adopting credit-smart behaviors. Even if you’ve experienced credit trouble in the past, there are still steps you can take to improve your situation. Check our partners in consumer advocacy, Consumer Action, for their extensive collection of publications on how to take steps to escape the debt trap.
This October 20th, take a look at your own credit behavior and look for areas of improvement. But remember, maintaining healthy credit isn’t something to consider just one day out of the year; rather, good credit is a life-long endeavor, and being credit-smart will definitely pay off in the long run.