Credit cards offer a lot of great perks and rewards, but those benefits can be canceled out if you end up paying hefty fees or interest. Mastering key credit card habits can help you keep your credit score healthy and enjoy your cardholder perks.
When used with planning and forethought, a credit card can be a really valuable and helpful financial tool to have in your arsenal. But if you misstep (which we all do from time to time), you risk hurting yourself financially. From a damaged credit score to unpleasant interest and fees, not having good credit card habits in place can turn this tool into one that does more harm than good.
To make sure you reap the most benefits from your credit card without experiencing any of the downsides, keep reading to learn what credit card habits you need to make a part of your regular routine.
1. Make on-time and early payments
First things first, one of the most important credit card habits you can perfect is to pay your credit card bill on time every single month. Missing a payment can hurt your credit score and result in having to pay interest and late fees.
When it comes to your credit score, your payment history is really important. For example, with FICO credit scores, payment history makes up 35% of your total credit score and is the most important contributing factor, which means that late payments can be very damaging to your score. On the flip side, however, making consistent on-time payments can really help you improve your credit score.
Making it a habit to make early payments also has its benefits. Aaron Bell, wealth advisor with Cannataro Family Capital Partners, explains that if you’re hoping to boost your credit score before applying for a credit product, you should pay your credit card balance down to zero before the end of your statement period.
“This can help boost the score, as well as lower your required minimum monthly payments in the eyes of lenders,” says Bell.
2. Pay off your card right away after making a big purchase
If you make a big purchase, this is another good time to pay your credit card balance off early instead of waiting for your end-of-month statement to arrive. Credit utilization (aka how much of your available credit you’re currently using) accounts for 30% of your FICO credit score. Ideally, you want to keep your credit utilization rate below 30%. If you make a big purchase that pushes you past that 30%, paying that off right away will help keep your score strong.
Bell notes that if you can afford to pay off large purchases right away, it’s a strategic way to reap cardholder rewards.
“Some credit cards allow you to redeem points on specific items, such as airfare and hotels,” says Bell. “Paying off your card right away after making a larger purchase, like a trip to Hawaii, can help you rack up points and stay ahead of your finances so you don’t get hit with major interest fees.”
If you can’t afford to pay off the large purchase right away, that may be a sign that you shouldn’t charge it. Knowing when to hold off on using your credit card is an equally important habit to adopt.
3. Review your statement carefully each month
When you receive your monthly credit card statement, it’s important to sit down and review it carefully every single month. This is a great time to confirm that you made all of the charges that you’re paying for and that no fraud occurred. You can also use this review to reevaluate your spending habits and budget.
You can also make a plan to pay off your balance if you need to carry one. Your statement will list how much you owe, when payments are due, what the consequences of making late payments will be and how much you will need to pay in interest and fees. In addition, it will show how long it will take you to pay off your debt if you make only minimum payments each month.
Howard Dvorkin, CPA and chairman of Debt.com, is the author of “Credit Hell – How to Dig Out of Debt.” Dvorkin shares perspective on reviewing credit card statements.
“Do you check your gas gauge before going on a road trip? Do you look at the expiration date before you drink the milk in your refrigerator? Sure you do. It takes only a moment. Same thing with reviewing your credit card statements,” Dvorkin explains.
Despite how easy it is to do this quick review, Dvorkin notes that many people skip this important habit, which can stop them from catching fraud or noticing how much they’re spending in certain categories.
4. Set limits on automatic credit increases
For any existing credit cards or future credit cards you apply for, take stock of what your current credit limit is and set a limit for how much your credit card issuers can automatically increase your credit limit without alerting you.
Some credit card issuers will automatically increase your credit limit without asking you if you have had the card for a while and consistently make on-time payments. If you struggle with spending temptations, a large credit limit may do more harm than good.
“Setting a limit on automatic credit increases can help keep you responsible and aware of the amount you are spending each month and in turn is a great way to make sure you can pay off your card each month,” Bell says.
5. Know what potential fees you face
To avoid running into credit card trouble, awareness is key. Especially when it comes to potential fees you may need to pay.
The following fees are ones you should be aware of for each credit card you have.
- Annual fee: Taking out a card with no annual fee is the best way to avoid this recurring charge. Although cards that charge fees typically come with great perks, you need to decide if those perks outweigh the cost of the annual fee.
- Balance transfer fee: If you want to transfer debt onto a balance transfer card, the credit card issuer may charge you a fee in the form of a percentage of the amount you transferred. Usually, balance transfer fees are $5 to $10 or 3% to 5% of your transferred balance.
- Cash advance fee: Some credit cards allow you to take out a cash advance, but they generally charge you a fee represented by a percentage of the amount you borrowed to do this.
- Foreign transaction fee: If you want to make a purchase with your credit card while traveling internationally, confirm whether or not your credit card charges foreign transaction fees (typically 3% of the purchase) every time you make a purchase. If you travel internationally a lot, having a credit card that has no foreign transaction fees can save you a lot of money.
- Late payment fee: One very good reason to make it a habit to pay your credit card bill on time each month is to avoid late payment fees. Legally these fees can’t exceed $40, but they can really add up if you miss your payments repeatedly.
6. Plan for residual interest
Residual interest (also known as trailing interest) is a particularly sneaky form of interest that a lot of credit card users aren’t aware of. If you’re carrying a credit card balance, residual interest is charged in the time period between when the credit card issuer sends out your statement to when it receives your payment.
To avoid residual interest, it’s best to pay off your card in full each month. If you are currently carrying a balance but are able to pay it off, don’t wait for that statement to come in the mail. Check your balance and pay it online. Your credit card issuer will include any real-time information about your leftover balance and any accruing interest on your online account. You can also call your credit card issuer and ask not just what your current balance is, but what your payoff balance is. That way you can make a payment that covers your balance and any residual interest. If you can afford to, overpay to make sure that all residual interest is paid off by the time the issuer receives your payment. Your credit card issuer will refund you any amount you overpaid.
Again, the best way to avoid residual interest is to avoid ever carrying a balance. Chaim Geller, financial advisor and personal finance expert at Help Me Build Credit, advises others to stop using any credit cards that have a balance on them.
“I highly recommend people who carry a balance on a credit card to immediately stop using that card and for future purchases… use a different card that you’re paying in full each month,” Geller says. “The reason being is because on the card you are carrying a balance on, you will end up paying much more interest due to the fact that the card does not have a grace period and interest starts accumulating from the day of purchase.”
Once you know the best practices for using credit cards, you can start to build healthy credit card habits that enable you to make the most of your cards without running into pesky fees or interest.
Paying your credit card off in full each month, keeping a close eye on your statements and having a plan in place to avoid fees and interest will help you enjoy the advantages of using a credit card – while avoiding the downsides.