The use of credit cards is on the rise. While some prefer them as they are convenient for shopping, others use them to build their credit history to avail themselves of lower interest rates on a mortgage and an auto loan down the line.
Credit cards work in a very simple way. Without worrying about the money you have to hand, you simply need to swipe it and wait to make the payment until a bill is generated. As the billing cycle ends, which refers to the number of days between two credit card statements, you will have a buffer period to budget for payments called a grace period, which can be a period of up to three weeks.
Credit cards are expensive and can be even more than you imagined if you continue to use them unheedingly. Once the bill is generated, you are to pay off the full balance on the due date to avoid paying interest. Keeping a balance on your credit card can wreak havoc on your credit score.
Here are the ways to manage your credit card responsibly:
- Find out how much your pocket allows
Credit cards do not give transparency about how much you are spending unless you keep tabs on your spending. Even if you do not max out your balance, you are susceptible to making a large purchase that blows up your budget.
If you pay off the whole balance, you will be left with insufficient money to pay your regular expenses, and if you do not, you will be in the red. This is a situation of being stuck between the devil and the deep blue sea. As a responsible borrower, you must know how much your pocket allows you to spend on top of your monthly expenses.
- Pay off the entire balance each month
Once the bill is generated, you will have a grace period to budget around the payment. Make sure you clear the whole of the balance on the due date. A minimum payment every month is an option, but interest will accrue on the unpaid balance. Interest rates are normally high. Keeping the balance every month will sabotage your credit rating.
- Do not exhaust the limit
Try not to max out the balance because if you do so, you will find it all the harder to pay it back in full when the bill is generated. At the time of qualifying for a loan, your credit utilisation ratio will be checked. It should not be more than 30%. The lower, the better. Not until you pay off the balance should you use your credit card for the second purchase.
- Try to pay more than the minimum each month
Having said earlier, you should pay off your credit card balance in full. There are situations when you may face complications in paying back the full amount on the due date. In order to make a default, you should try to make a minimum payment.
However, if you pay more than the minimum payment, you can prevent your balance from continuing to build up due to accrued interest. If you have other debts as well, you should try to take out debt consolidation loans with bad credit from a direct lender.
In the case of multiple credit cards, you can apply for a balance transfer credit card. This will help you take advantage of an interest-free period.
- Review your credit card statement
When a credit card statement is generated, you should carefully look at it to know your spending behaviour and the types of transactions you make through your card.
When you peruse your usage, you can make some better decisions about spending so you do not struggle with payments of credit card bills. Looking at your credit card statement also lets you know if you have been subject to identity theft.
- Develop good spending habits
After the perusal of your credit card statement, you can check the nature of your transactions. It is crucial to know which kinds of expenses are particularly rising and which transactions are particularly eating up your budget. Understanding your spending behaviour will help you stay on top of your credit card bills.
- Do not close old accounts
Most of the people do not realise the repercussions of closing all old credit accounts. As a result, they end up impairing their credit utilisation ratio. Closing old accounts will reduce your credit card limit and increase your credit utilisation ratio. If it is over 30%, you will face difficulty availing of lower interest rates on loans to be taken in the future.
- Check your credit report regularly
You can ask for a free copy of your credit report from all credit reference agencies to check your credit rating. Be wary of defaults, transactions and missed payments that you do not recognise. In the event of identity theft, you should inform credit bureaus. They will take a few days to address your case.
- Maintain self-discipline
Credit cards require self-disciple, no doubt. Even if your credit card has a higher limit, you should set a rule for the maximum amount of transaction you can make using it.
Instead of picking a random figure, you should look at your budget and find out how much you can actually spend on top of your monthly expenses. A monthly budget can come in handy to stick to the amount.
- Carefully plan about opening new credit cards
Opening new credit cards can increase your limit and lower your credit utilisation ratio. For some reason, it can be good to have a few credit cards, but before you do so, you should carefully think about it. Whatever the reason, you will end up taking a toll on your credit rating. In fact, transferring balances can also hurt your credit score.
Further, having too many credit cards will make it difficult for you to keep track of payments. If you need to borrow money, you should try to consider no guarantor loans in the UK instead of opening a new credit card or maxing out your old credit cards.
The bottom line
If you do not want to lose your credit points, you should try to use your credit cards quite responsibly. Do not apply for too many credit cards frequently, nor do you close all your old accounts.
Understand your budget and then decide how much you can actually afford to pay on your credit card. Develop good spending habits and avoid maxing out your credit card. Try to pay off the balance in full. If you cannot, you should pay more than the minimum amount.
